Saturday, March 7, 2015

More infrastructure spending would boost economy

It's good to see Joe Hockey finally making the transition to government and joining the economic optimists' party. This week he greeted the national accounts by saying the economy had grown by "a solid 0.5 per cent in the December quarter to be 2.5 per cent higher over the past year".

"Our income as a nation picked up in the quarter, with nominal gross domestic product rising by a solid 0.6 per cent," he continued. "Real gross national income also rose in the quarter."

A treasurer should never talk the economy down, just as the official forecasters should never be the first to predict imminent recession. Such negativity tends to be self-fulfilling.

So I'm sorry to rain on Hockey's parade by telling you that "solid" growth is the econocrats' euphemism for "not so hot".

Just so. Annual growth of 2.5 per cent is well below our trend (average) rate of 3 per cent, especially disappointing when you remember we've been well below trend for quite a few years.

But though the figures from the Bureau of Statistics were unsatisfactory, they don't support the earlier fears of some that the economy fell apart in the previous quarter. A sensible reading is that the economy continues to plug along at the rate of about 2.5 per cent a year.

This, of course, is insufficient to stop unemployment rising. But for some years the rate of worsening has been steady at about 0.1 percentage points a quarter – which fits with reasonably steady growth in real GDP of about 2.5 per cent a year.

One encouraging sign in the accounts is that consumer spending grew by 0.9 per cent in the quarter and 2.8 per cent over the year. This isn't too bad when you consider that, with weak growth in employment and wages, real household income is growing at an annual rate of only about 1 per cent, according to calculations by Kieran Davies of Barclays bank.

Clearly, households must be reducing their rate of saving. Over the past year it's edged down by about 1 percentage point to a still-high 9 per cent of household disposable income. From now on consumer spending should be boosted by the fall in petrol prices.

Another bright spot is home building, which grew by 2.5 per cent in the quarter and by more than 8 per cent over the year. This is one area where the Reserve Bank's exceptionally low interest rates are really working, with building approvals reaching an all-time high in January.

It's likely all the real estate activity is helping to boost consumer spending on durables. There's nothing like changing houses to make you think you need a new lounge suite.

The weakest part of the accounts was business investment spending, which fell by almost 1 per cent in the quarter. Within this, and according to Davies' figuring, mining investment fell by 5 per cent while non-mining investment grew by only 2 per cent.

This is where we need the economy to be making the transition from the mining investment boom to non-mining-led growth. It's happening, but not fast enough to get the economy heading back towards trend growth.

That's why the Reserve has reverted to cutting interest rates. Not so much because the economy was slowing as because it wasn't picking up the way it had expected. And it's early days yet: mining investment fell by about 13 per cent last year, it's expected to fall by about that much again this year and by a lesser amount in 2016.

Arithmetically, the big saviour was the rising volume of exports, up 1 per cent in the quarter and more than 7 per cent over the year. This was driven by mineral exports, of course.

Combine that with a 2.5 per cent fall in the volume of imports in the quarter and "net exports" (exports minus imports) contributed 0.7 percentage points to GDP growth in the quarter and 2 percentage points to growth over the year.

Why are imports falling? Mainly because less mining investment means fewer imports of heavy mining equipment, but also because the fall in the dollar seems to have discouraged imports of business services and Aussies from "importing" overseas holidays.

But I can't get too excited about the surge in mineral exports. Mining is so capital-intensive that far fewer jobs are created by higher mineral exports than you'd expect from a jump in other exports. If that's the best we've got going for us, it's not good enough.

One more point of interest: spending by the public sector rose by a mere 0.1 per cent in the quarter and actually fell by 1.1 per cent over year. So, no help from government spending in getting the economy moving.

But before you start muttering about "austerity" and blaming poor old Joe, note this: public consumption spending rose by 0.4 per cent in the quarter and by 2 per cent over the year, whereas public investment spending fell by 0.9 per cent in the quarter and by (an amazing) 11.9 per cent over the year.

The great bulk of spending on capital works – "infrastructure" if you prefer – is done by the state governments. So it seems that, between them, the state governments – unduly worried about retaining their high credit ratings – have been allowing their works programs to run down.

This at a time when so many mining construction projects are winding up and construction workers and other resources are becoming available. Sensible governments adjust their construction programs to fit with downturns in private sector activity and take advantage of lower construction costs, thereby doing themselves and the economy a favour.

With monetary policy (interest rates) now less effective in stimulating the economy, it would be better if fiscal policy (budgets) was doing more to help, not less.

Friday, March 6, 2015

Intergenerational report a disappointment

The five-yearly intergenerational report ought to be highly informative, leading to serious debate about the economic choices we face. In the hands of Joe Hockey, however, it has become little more than a crude propaganda exercise.
As such it will be quickly cast aside, like last year's report of the Commission of Audit. Within a few days all that will remain is the taxpayer-funded advertising campaign. It, too, will be more about spin than brain-food.
Hockey has shifted the report's focus from the next 40 years to the government's present struggles with the budget. The message he wants us to take away is that it's all Labor fault, but the government has worked hard to greatly reduce the problem. And were not for those crazies in the Senate - who seem to think our spending cuts were unfair - last year's budget would have set us up for budget surpluses right through to 2055.
The message we should take away from it, as with its three predecessors, is one no politician on either side is prepared to admit: as our demands on the government for more and better services continue to grow, we will have pay for them with higher taxes. Since our real incomes are projected to rise by almost 80 per cent, this won't be so terrible.
Instead, the message from all these reports is that there is no alternative to sweeping cuts in government spending, unfair or not.
They come to this conclusion by quietly assuming that before long we will return to annual tax cuts, even as the budget deficit and debt get bigger every year. Sure.
If you wonder how anyone could have any idea of how things will play out over the next 40 years, you are right. No one can. The one thing we can be sure of is that, whatever the budget and the economy end up looking like in 2055, it won't be what this report says they will.
The mechanical projections in this report are based on a host of assumptions about an unknowable future. Some of those assumptions are spelt out in the fine print, some aren't. Some are honest guesses, some have been chosen to lead us to the conclusions the government wants us to reach.
One demonstration that projecting what will happen over the next 40 years is unavoidably dodgy is that the four successive reports have each come up with widely differing figures for where the budget will end up.
One demonstration of the report's lack of genuine concern about our future is its dismissive treatment of climate change. The biggest risk we face in 40 years' time is the budget deficit?
One demonstration of the report's inadequacy is its failure to take account of what may be happening to the state governments' budgets. This allows it to claim last year's budget measures would have restored the feds to eternal surplus, while ignore the consequences of Hockey's proposal for ever-growing cuts in grants to the states for hospitals and schools. Really?
To be fair, before Hockey got into the act Treasury would use the intergenerational report for its own propaganda. Its message was aimed at its political masters: the budget may look OK now, but there is a lot extra spending coming in a few years' time, so keep running a tight ship.
It was spectacularly unsuccessful. The Howard government went mad with tax cuts and middle-class welfare and Rudd and Gillard were a fraction worse with their unfunded schemes to help disadvantaged school kids and the disabled.

And these guys think it's all our fault?

Wednesday, March 4, 2015

Cities: jobs in the centre, most people on the outer

It's remarkable how few new ideas most economists get. They look at the world the way they always have and worry about the same things they've always worried about, chasing the same rabbits down the same burrows.
They analyse the world using their standard model and see those things the model is designed to highlight, but don't see anything that's outside its scope.
What most economists rarely think about is the spatial dimension of the economy. It's ignored by their model, so it's ignored by them. Could it have something to tell us about why the economy isn't functioning as well as it could? Who knows?
Jane-Frances Kelly and Paul Donegan, that's who. They've been studying the economics of our cities for the Grattan Institute, and their eye-opening findings are explained in their new book, City Limits: Why Australia's cities are broken and how we can fix them. Here's my version of their message.
Despite our self-image as sun-bronzed sons and daughters of the soil, we are a nation of city-dwellers. Australia is one of the most urbanised countries in the world.
Our capital cities are growing and most of our income is being generated in them, notwithstanding the big expansion in mining, which is more about additional structures and capital equipment than workers.
For at least the past 40 years, all the net increase in employment has been in the services sector, and the services sector exists mainly in cities. The arrival of the knowledge economy will only heighten this trend.
Most of the economic action in our capitals is occurring near the centre of the city. Just the Sydney and Melbourne central business districts – occupying a combined area of a mere 10 square kilometres - account for about a quarter of each city's production.
Businesses crowd into the CBD because it gives them the easiest access to desirable employees and because they benefit from being close to the other firms in their industry and their suppliers. It facilitates the transfer of knowledge. Get it? They think that crowding together increases their productivity.
The biggest trend in city property prices is not just big rises over time, but the way inner-city prices are rising so much faster than outer-city prices as people seek "proximity" – closeness to the centre, with all its facilities and jobs.
Researchers at the Reserve Bank have shown that if you draw a graph with home prices on the vertical axis and distance from the CBD on the horizontal axis and then plot actual prices, you get an almost perfectly downward-sloping curve for Sydney, Melbourne, Perth or Brisbane. On average, prices are highest close in and lowest far out.
For the five mainland state capitals, 60 per cent of all the employment growth over the five years to 2011 occurred within 10 kilometres of the centre. But here's the problem: no doubt because inner-city house prices were so high, about 55 per cent of the population growth occurred 20 kilometres or more from the centre.
In other words, we've been developing a big economic and social problem few economists have noticed: a growing spatial divide between where the jobs are and where people live.
It's an economic problem because it increases the economy-wide costs of each day's production of goods and services. It's a social problem because, for the most part, those costs fall on the less-wealthy working families living in outer suburbs. Some of the costs come as dollars paid, some as time wasted and some as opportunities forgone.
The growing distance between where we live and where we work means car travel in peak periods is getting slower in all capital cities. Traffic is slowest on inner-suburban roads, because that's where most people are travelling to or from.
Over the past decade, the proportion of people spending more than 10 hours a week commuting has increased by about half. One in four full-time employees spends more time commuting than with their children.
Women caring for children in outer suburbs face tough choices, with a lack of accessible jobs forcing some out of the workforce altogether.
So what can we do about it? We need to reduce congestion and make it easier, quicker and cheaper to move across the city. To me that means improving access to public transport – which is excellent in the inner-city and woeful in the outer suburbs – not returning to our earlier delusion that building more expressways will fix it.
One day we'll have the courage to use time-of-use tolling to encourage those who have the flexibility to avoid travelling in peak periods to stop doing so.
But improving public transport is expensive and can be only part of the solution. The authors stress the need to increase the supply of semi-detached homes – terraces, townhouses and low-rise blocks of flats – in inner and middle suburbs.
This would require changes to complex planning and zoning regulations – and a lot of public consultation if the changes are to stick. But if so many people want to live closer in, we need to accommodate their wishes.
With the release of another intergenerational report this week, we'll be hearing much agonising by politicians and economists about why our productive efficiency isn't improving fast enough. But don't hold your breath waiting for them to acknowledge that a fair part of their problem is spatial.

Monday, March 2, 2015

Treasury under new management

How much does the Treasury's view of the world change when a prime minister comes to power, sacks the head of Treasury (and his heir apparent) and replaces him with his own hand-picked man from outside the public service?

That's what the economic cognoscenti were asking last week when our first political appointment as Treasury secretary, John Fraser, made his first public appearances at a Senate estimates hearing and as a speaker at a conference of the Committee for Economic Development of Australia.

Fraser had risen to the rank of deputy secretary when he left Treasury in 1993 to make his name and fortune as an investment banker at the global level of the UBS bank. It's hard to imagine such an old and rich chap would hang around long if he found his advice wasn't being heeded.

From what he's said so far, you don't get the feeling Fraser has spent the past 22 years keeping tabs on the Australian economy or keeping abreast of the latest applied research on fiscal policy. Even so, he's a man of strong and confidently held opinions, who isn't afraid to tell you about them.

His views were pretty conservative when he left Treasury, at a time when the views of Treasury itself were more cautious than they've been in recent years, and his time as a chief executive is unlikely to have radicalised him.

Dr Martin Parkinson and Dr Blair Comley seem to have been sacked for their lack of scepticism about climate change, so we can presume Fraser doesn't share that failing. I may be wrong, but I don't see him as someone who wastes much time worrying about "wellbeing frameworks".

We know from his evidence to the Senate that he's a great admirer of Ronald Reagan's tax cuts of the early 1980s (which did so much to lay the foundations for America's present towering public debt), but has "old-fashioned" views about the evil of public debt.

He is sceptical about using the budget to stimulate the economy when it's very weak – which means he's invalidated one of the best arguments for getting debt down: the need to "reload the fiscal cannon" ready for the next recession.

And he thinks the policy of "austerity" practised in Britain and (by default) America has been a great success. This opinion he expressed to the Senate and backed up with figures in his later speech.

To silly people on the left, "austerity" is a swear word you slap on any budget saving you disagree with. But it really means a policy of cutting the budget deficit hard even while the economy is very weak.

The lefties never understood that Joe Hockey's first budget was carefully crafted to involve minimal net cuts to the deficit in the first three years, with the big hit delayed until 2017, when the economy was expected to be back growing strongly.

So, is true austerity about to come to Oz under the advice of the new Treasury boss? You might think so. Fraser says "we need to start now" and repairing the fiscal (budgetary) position is "an immediate priority".

But I'm not so sure. Later in his speech he advocates "committing now to savings measures that build over time to deliver a return to surplus over the medium term". And asked if now was the time to cut savagely considering the weak outlook, he said the coming budget would have to be "tailored to the situation".

While much of what Fraser has said so far is what you'd expect of an Abbott appointee, some of it isn't. His summary of how the budget got into its present state doesn't put all the blame on Labor, but acknowledges the role of excessive tax cuts and spending by the Howard government.

And while noting that government spending has grown at an average real rate of more than 4 per cent a year since 2007-08 (mainly under Labor), he also noted that it grew by about 3.5 per cent a year over the four years to 2007-08 under the sainted Howard government.

He is sharply critical of the increase in "middle-class welfare" in Howard's last years, including Peter Costello's (obviously unsustainable) superannuation changes, which he highlights for reform.

And unlike the huge majority of economists, he frankly admits the great drawback to using immigration to boost economic growth: it "places additional demands on government budgets in areas such as infrastructure, health and education".

Maybe high immigration, but inadequate investment in business equipment, housing and public infrastructure, help explain why our rate of productivity improvement isn't as great as Fraser says we need.

Saturday, February 28, 2015

Why a 10-year census would be fine

What's the difference between a census – a full count – and a sample survey? The census will always be superior, right? Not really.

With talk that the Bureau of Statistics and the government are considering changing our census of population and housing from five-yearly to 10-yearly and making up for this with regular sample surveys, the difference between the two has suddenly become a question of interest to more people than just students of statistical theory.

Since all of us have to fill in the census form, many people have opinions on the topic. And it seems from the feedback backbenchers are getting that some of us quite enjoy census night. There's a feeling of togetherness as families across the land sit up answering a seemingly unending questionnaire for each person in the family.

In principle, a census provides a true measure of the population because, by definition, it doesn't involve any risk of sampling error. But if you think that makes censuses foolproof, you're mistaken.

For a start, in practice you fall well short of a 100 per cent "enumeration". When you've got to get forms from everyone, no matter how elusive or remotely located, you're bound to come up short. So you have to adjust the figures for this undercount, which you do by (get this) conducting a "post-enumeration survey".

For another thing, the answers you collect may be wrong, because people misunderstood the question or are being less co-operative than they should be. Errors in the census are both expensive and difficult to reduce.

Censuses are conducted on a particular day, which may or may not be representative of other times during the year. From that day on, the counts become ever-more-outdated. The things we're measuring are often too important for us to wait another five years for another count, but anything you do to update the figures in the meantime won't have the same certainty as a census.

Attempting to question every person in the country is such a huge exercise that it's hugely expensive. The census in 2011 cost taxpayers about $440 million. And because there's so much data on so many subjects, it takes ages to process. The figures can be maybe two years old before we get to see them.

It's such a major exercise that the bureau begins planning the next census two years before the latest one has been conducted.

A big part of the reason some people have been dismayed by news that a move from five- to 10-yearly censuses is being considered is that they've heard only half the story. They know what they'd lose, but not what would be put in its place. Researchers and interest groups who make great use of a particular part of the census have visions of going 10 years between drinks.

But another part of the problem, I suspect, is that a lot of people don't know much about the wonders of the science of statistics, a branch of mathematics that draws particularly on probability theory.

One way of thinking of statistical science is that it's the study of ways to be sure you're drawing accurate conclusions from a bunch of puzzling data. Another way is that statistics is the search for ways to draw accurate conclusions about a "population" (of people, things or events, such as all the road accidents in Victoria in 2014) as quickly, easily and cheaply as possible.

Get it? Statistics is the discovery of mathematical tricks that allow us to avoid all the hassle, delay and cost involved in always having to do censuses of this, that and the other.

The truth is that, as interestingly told by an article in the Christmas issue of The Economist, we've made great strides in this just since World War II.

In which case, why shouldn't we take advantage of this technological advance, just as we unhesitatingly take advantage of advances in computer science? Why run to the great expense of frequent censuses when we can get results that are almost as reliable, and in other respects better, much more easily, quickly and cheaply by using sample surveys?

That, after all, is why we've developed sampling theory – being able to take just a small sample of a population and draw accurate conclusions about the characteristics of that population.

The trick to sampling is to ensure the sample has been drawn at random from the population – to be sure it's representative of that population – and to ensure the sample is large enough to make conclusions reliable.

Sampling theory tells us how big a random sample needs to be, given the size of the population. It does so using probability theory. In the case of the population and housing census, we get information about innumerable, quite small sub-populations – such as the proportion of dwellings in the Sydney CBD that are owned outright by owner-occupiers. The smaller the sub-group, the bigger the sample needs to be to maintain accuracy.

The Americans conduct their census only every 10 years and keep it very short. But they make up for this by having an annual survey of the population covering a host of questions, with a sample size of (get this) three million households, representing 1 per cent of the population.

It seems that if we decide to go to 10-yearly censuses, we'll introduce a similar, detailed annual survey, with a sample size covering about a million people. (Our present monthly household survey – from which we get our estimates of unemployment – covers about 55,000 people.)

This would leave us with a 10-yearly census to "benchmark" all our surveys against, but give us much more frequent, less outdated, accurate information about a host of census topics, doing so more flexibly.

It would do so quickly, easily and much more cheaply, enabling us to spend the saving on replacing the bureau's ancient computer systems.

Wednesday, February 25, 2015

Raising mothers' job participation only half the story

I'm not sure how many barbecues it's stopping these days, but the issue you and I call childcare and the politically cool call ECEC - early childhood education and care - is still one of great concern to experts ranging from hard-headed economists to soft-hearted social workers, not to mention the odd parent.
From a narrowly economic perspective, childcare matters because any problems with it limit women's participation in the paid workforce and economists have decided increasing the "participation rate" of women and older workers is a key to reducing the budgetary cost of an ageing population and to maintaining our rate of economic growth.
With girls now more highly educated than boys - and with the taxpayer having contributed significantly to funding  that education - it's been obvious for a few decades that it makes little sense to allow the conventions of a labour market designed for men to prevent women from participating fully in the workforce.
Taxpayers want a return on their investment, economists want faster growth, and the women want to take advantage of their education by earning money and enjoying the greater mental stimulation that goes with a job.
Under pressure from families across the country, governments have been struggling to make the appropriate renovations since the days of Bob Hawke and Paul Keating. Their cumulative alterations and additions have been a bit patchwork.
One early move was to reduce the cost of childcare by introducing a means-tested childcare benefit. Then the Howard government added an unmeans-tested 30 per cent rebate of parents' net childcare costs. The Rudd government raised the rebate to 50 per cent.
Next came Labor's relatively frugal paid parental leave scheme, which Tony Abbott promised to top with a scheme much more generous to higher income-earners. Most of these measures came as election promises.
But under immense pressure from his colleagues, Abbott has now abandoned this promise, accepting the argument that, if there's any extra taxpayers' money to be spent, improving the cost and availability of childcare would be more effective in raising women's participation.
The government will now consider the recommendations of a report from the Productivity Commission in preparing a "families package", to be announced in the next few months.
The commission's main proposal is for the means-tested benefit and the unmeans-tested rebate to be rolled together into a means-tested "early care and learning subsidy". At little extra cost to government, and little change in the present overall average subsidy of about 65 per cent of cost, the new arrangement would increase the subsidy going to low to middle-income families and reduce it for high-income families.
For families with two kids in care, we're talking about gains of up to about $20 a week or losses of up to about $10 a week.
But the commission is quick to warn that such a change is likely to produce only a small increase in mothers' participation in the workforce. It estimates an extra 25,000 people working part time, equivalent to about 16,400 working full time.
Of course, the government could induce more participation if it was willing to spend more on the subsidy. It had planned to cover the cost of its more generous paid parental leave scheme by imposing a levy on big business. Will it make big business help bear the cost of higher participation?
But the cost of childcare is just one of the financial factors affecting mothers' decisions about whether to take a job and how many hours to work. The commission notes sadly that "the interaction of tax and welfare policies provide powerful disincentives for many second income earners to work more than part time".
It's trying to say that when their husbands have reasonably paid jobs, mothers who earn more don't just pay tax on their earnings, they have their family tax benefit cut back, leaving them without much to show for their efforts.
It's one of the great drawbacks of Australia's unusually heavy reliance on means-testing and probably does a lot to explain why our rates of female participation are lower than in other English-speaking countries.
But none of this explains why childcare has become "early childhood education and care". It's in response to the growing scientific evidence that children's experiences in the earliest years of their lives greatly affect the development of their brains, with implications for their wellbeing - and misadventures requiring government intervention and expense - throughout the rest of their lives.
Far too slowly, these insights are affecting government policy. They've had a big effect on childcare, leading to better paid and qualified carers and more emphasis on nurturing infants' mental development.
As part of this, there is federal and state agreement to increase the proportion of children either attending a dedicated preschool or participating in a preschool program in a long-day care centre.
"The benefits of quality early learning for children in the year prior to starting school are largely undisputed, with evidence of immediate socialisation benefits for children, increased likelihood of a successful transition into formal schooling and improved performance in standardised test results in the early years of primary school as a result of participation in preschool programs," the commission says.
The greater emphasis on early childhood development is one area where our economic aspirations and social aspirations fit together well.


Monday, February 23, 2015

One bad budget doesn’t kill all reform

If Tony Abbott and Joe Hockey fail to keep their jobs, and the more so if their successors fail to pull the government out of its dive, the 2014 budget will go down as the most fateful budget in Australia's history, worse even than Artie Fadden's original horror budget of 1951.

Should Abbott's prime ministership or his first-term government come to an early end, all the denizens of the House with the Flag on Top will conclude it was the budget wot dunnit.

And they'd be right. Whatever Abbott's other failings, it was the unpopularity of his first budget – one over which he kept tight control – that started the slide in popularity that has continued to now.

The point is that perceptions about what caused the 2014 budget to be such a government-wrecker are forming as we speak. Those perceptions will affect the attitudes of a generation of politicians and econocrats towards the politics of budgeting and economic reform.

It doesn't take long for such perceptions to set like concrete. Once they have, they become impervious to contrary evidence. So it's important the popular wisdom about why the budget went over so badly with the electorate – and, hence, the Senate – be soundly based.

One common conclusion is that this budget heralds the end of the era of reform: the punters simply won't cop anything that imposes any kind of cost on them. This is defeatist, an attitude that condemns us to ever worsening debt and a set of economic arrangements that become ever more inappropriate to our ever changing circumstances.

Fortunately, it's an unwarranted conclusion. It's actually self-serving: we did nothing wrong except ask our fellow Australians to accept a small amount of sacrifice in the interests of getting the budget back on track, but they rejected us.

Rubbish. As everyone knows, Abbott and Hockey did a host of things wrong. Another self-serving line is: there was nothing wrong with the measures we proposed, we just failed to "sell" them effectively.

That's half true: Abbott and Hockey have proved to be even worse at explaining and justifying their policies than their Labor predecessors. But to pretend that was the only thing they got wrong is laughable.

Yet another excuse – all the blame lies with an unprincipled opposition and a few crazies in the Senate – is also too easy. We've long lived in an era where oppositions play hardball in the Senate.

It's rare for governments to have the numbers in the Senate, so an essential skill for governments hoping for a long reign is an ability to negotiate with the minor parties, plus the foresight to ensure any controversial measures bowled up in a budget have built-in wriggle room.

What was outstanding about this episode was Abbott's lack of foresight. To get into government I'm going to be utterly ruthless in my treatment of Labor, but once the tables are turned Labor won't do the same to me.

I'm going to exaggerate the deficits and debt problem, and boast about our superior ability to fix it, but that doesn't mean I should tread carefully in the promises I make to exempt particular areas of spending from the knife.

Anyone who knows anything about "fiscal consolidation" (getting deficits down) knows that pretty much every successful attempt has involved a combination of spending cuts and tax measures. Abbott tried to do it just with spending cuts and came badly unstuck.

It was a recipe for being seen as unfair. Our system of means-tested benefits means the spending side of the budget is aimed mainly at the bottom half, whereas our array of special concessions on the revenue side are of most benefit to the top half.

I'm confident most pollies will have got the message that tough budgets must be perceived to be reasonably fair. You need at least one big measure the rich really whinge about, such as John Howard's 15 per cent superannuation surcharge.

The message for the business lobbies is that even if, as happened this time, you con a naive Coalition government into exempting you from the nasties, it will come unstuck and you'll be left with nothing.

The message for econocrats and economists, trained to regard "distributional" considerations as not their department, is that you ignore fairness at your peril. They ought to have learnt by now that anyone lacking their training is utterly incapable of keeping "efficiency" and "equity" in separate boxes.

Reform is still possible, provided you haven't sworn not to do it, provided it's seen to be reasonably fair and provided you spend a lot of time explaining why it's needed.

Saturday, February 21, 2015

How Australia's supply of labour is changing

The trouble with the way the media report developments in the labour market from one month to the next is that we don't get a sense of the major shifts that occur over time.

So today let's take a much longer view, examining the trends over, say, the two decades from 1993 to 2013. We'll do so with help from an article by Professors Roger Wilkins and Mark Wooden, of the Melbourne Institute, published in the latest issue of the Australian Economic Review.

Note that this period covers most of the continuous economic upswing since the severe recession of the early 1990s. So most of the trends are reasonably good. It's true, however, that we were knocked off track briefly by the global financial crisis of 2008-09 and in more recent years have suffered a slow deterioration in unemployment as the economy makes heavy weather of the end of the mining investment boom.

But that's getting ahead of the story. Actually, it's such a long story that today I'll limit it to the side that gets least attention from the media, changes in the supply of labour. It's best measured by changes in the "participation rate" – the proportion of the population of working age who are participating in the labour market by making their labour available, either by having a job or actively seeking one.

Taken overall, the "part rate" increased pretty strongly until 2008, when it began falling back. But all of this overall increase is explained by the increased participation of women, particularly those of prime age, 25 to 54.

There's been a long-term slow decline in the participation of men. It's explained partly by young males staying longer in the education system but mainly by older workers retiring earlier – voluntarily or otherwise.

But here's where the story gets complicated. The trend to earlier retirement turned around at about the turn of the century, with participation by both men and women aged 55 and over rising significantly.

Got that? Now try this. Although more people are retiring later, the part rate reached a peak in 2008, has fallen since then and is likely to continue falling for years yet. Why? Because of the ageing of the population.

The trick is that even if the part rate is now rising in older age groups, population ageing means that an ever-rising proportion of the labour force is in those older age groups, whose rates of participation will always be a lot lower than the rates for people of prime age.

To show the significance of this ageing effect, the authors calculate that if the age structure of the population in 2013 was the same as in 1993, the overall part rate would be 2.2 percentage points higher than it actually is.

However, we do have some scope to moderate this demography-driven decline in participation. Wilkins and Wooden note that the rates of participation for 55 to 64-year-olds are between 7 and 14 percentage points higher in New Zealand than they are in Oz. If the Kiwis can do it, what's to stop us doing it?

The part rate covers the quantity of people willing to supply their labour, but there's also the question of changes in the quality of the labour being supplied.

The past 20 years have seen a big improvement in the skills – education and training – of the labour force, with the proportion of university graduates more than doubling from 12 per cent to 28 per cent. The proportion with any post-secondary qualification rose from less than 46 per cent to more than 62 per cent.

By the way, it's likely that the continuing rise in women's participation is largely explained by the dramatic increase in females' academic attainment. The higher men and women's level of education, the greater the likelihood they'll be in the labour force – exploiting the commercial value of their skills – and the less the likelihood of them being unemployed.

Of course, another part of the labour supply story is immigrant workers. Immigration has long been a major source of additional labour and today accounts for more than a fifth of the labour force. What's changed is that throughout the last century most migrants came on permanent visas, whereas today most come on temporary visas.

In March last year there were almost 900,000 people on temporary visas with work rights, including more than 200,000 on "457 visas" for skilled people and about 370,000 on student visas. If all these people actually participated they'd amount to 7 per cent of the labour force, the authors estimate.

Separate to this were almost 650,000 people on the special visas for New Zealanders, some of whom will prove to be only temporary residents. (Don't forget Aussies have reciprocal rights to work in Kiwiland.)

We now grant about 125,000 457 visas a year and about 100,000 student visas a year. This compares with about 130,000 old-style permanent visas a year to skilled immigrants, many of which are given to people already here on temporary visas.

The authors observe that the shift towards temporary migration has probably had a big effect on the labour market.

"The availability of a flexible skilled immigrant workforce that can respond to changes in labour demand relatively quickly is likely to have improved the operation of the labour market, especially from an employer perspective," they say.

Oh. Yes. To me the main drawback is not so much that employers may not try hard enough to find local workers to fill jobs, or that the availability of this external supply may limit to some extent the rise in skilled wages, but that it reduces employers' incentive go to the bother of training young workers.

Still, we mustn't forget that, these days, the economy is run for the benefit of business, not the rest of us.

Wednesday, February 18, 2015

It helps to know how to save

The great middle-class virtue is the ability to delay gratification. We could spend all our money now, but wouldn't we be better off if we saved some of it for the future?
We could take the best job we can get as soon as we're old enough to leave school, but wouldn't it be better to stay on in education and eventually get a more highly paid and satisfying job?
Research confirms that the better you are at controlling your natural desire for immediate gratification, the better your life is likely to be.
But those of us who have been imbued with these attitudes and abilities by our parents have a tendency to judge those who lack them with undue harshness. We care about the poor, of course, but we have a big category for the undeserving poor.
All those who could find a job if they wanted to. All those who don't take the simple precaution of buying insurance. All those who can't even budget properly. Poor people who spend their incomes on wide-screen TVs and smartphones. Poor people who still smoke.
If we were as poor as that we'd jolly well know how to lift ourselves out of it. And if we could do it, so can they.
The truth is we're too harsh in our judgments. Partly this is a tendency to give ourselves more credit for our comfortable lives than we should. We imagine ourselves to be "self-made", taking all the credit for choosing our parents wisely. We forget how much we inherited - if not in money and a good education then in attitudes and example.
But another part of our harshness is our inability to appreciate how hard it can be to pull yourself up by your bootstraps when you're at rock bottom. Few of us have the remotest idea of how we'd make ends meet on $427 a week for a single pensioner or less than $300 a week for singles on the dole.
We have little idea of how much harder it is with not a bean to fall back on when unexpected bills arrive, or how financial difficulties can multiply when you simply can't afford insurance.
And yet it is true that some people on welfare benefits or among the working poor would benefit from being helped to acquire the saving habit.
This is where I have encouraging news. Ten years ago the ANZ Bank and the Brotherhood of St Laurence got together to design a program to encourage people on very low incomes to save. They were later joined by the Smith Family, the Benevolent Society and the Berry Street organisation. In 2009, the federal government began giving grants to help them spread the program across Australia.
On Wednesday the bank and the charities will release a 10-year review of the performance of Saver Plus, conducted by Roslyn Russell, Mark Stewart and Felicity Cull, of RMIT University.
It's been a remarkable success. So much so that this, the first matched-saving program in Australia, is now the largest and longest-running program of its kind in the world.
As it has evolved, the scheme now requires people to agree to save up to $500 over 10 months. Achieve that and ANZ will match it, leaving you with up to $1000 to spend on your child's or your own education. You set your spending goal at the outset.
The program also involves four financial education workshops covering planning and budgeting, saving and spending, everyday banking, and planning for the future. Participants have access to a Saver Plus worker for advice and help should difficulties arise.
Eligibility is limited to people with a healthcare or pensioner card and regular income from paid employment, as well as a need to cover education expenses.
The program has had more than 23,000 participants, 86 per cent of whom are women. It now operates at 60 locations across all states, with more than 500 ANZ branches making referrals.
About 15,000 people have fully achieved their target, with only 12 per cent withdrawing from the program. So far participants have saved $13.6 million, with the ANZ adding more than $10 million.
You may think ending up with savings of as little as $1000 doesn't prove much, but it's really about acquiring the saving habit. And 87 per cent of people who completed the program say they've continued saving the same amount or more.
Great majorities of completed participants say they now have increased self-esteem and increased confidence, are better able to deal with financial problems, have more control over their finances, are better equipped to deal with unexpected expenses and experience less stress about the future.
About 27 per cent have taken out insurance policies and 19 per cent have increased their super contributions.
"Having education as the saving goal ... has been a large contributing factor to the value of the program to individuals and society," the report concludes.
"It has increased access to education for many participants and enhanced the quality of education for children and adults. Positive experiences of education - for children especially - have significant long-term benefits and increase development opportunities throughout their lives."
One point to add. The program's federal funding comes up for renewal in June. You'd hope this stuff is right up the Coalition's alley.

Monday, February 16, 2015

Don't fix the budget while the economy is weak

We are hearing a lot of muddled thinking about how the Liberal Party's leadership ructions affect the budget and the economy, much of it coming from business people. For the sake of their businesses, they need to think more clearly.

There must be some truth to the idea that the political uncertainly is adding to the lack of business confidence, but the contention it's a big factor is dubious. "Confidence" is such an amorphous thing that you can say what you like about why it's up or down without anyone being able to prove you're wrong.

What's incontrovertible is that non-mining business investment spending isn't growing very strongly - not as fast as the Reserve Bank was hoping it would be by now, nor fast enough to offset the rapid slide in mining investment.

I think the main reason for this is simply that businesses don't see much need to expand at present: their sales aren't growing all that strongly and they're not about to run out of spare production capacity.

Any chief executive who has failed to take advantage of profitable investment opportunities because he's so worried about the instability in Canberra deserves the sack.

No, I think it works the other way round: because the economy's flat and you're waiting for an attractive investment opportunity to arise, you rationalise your inactivity by drawing attention to all the failings of the pollies supposed to be running the economy.

The danger with all this hand-wringing about "confidence" is that it's supposedly hard-headed business leaders resorting to wishful thinking: "if only we could have a change of prime minister, everything in the economy would be much better".

Part of the business angst has been worries about the budget: "it's vital we get the budget back to surplus to help the economy" and "it will be a terrible thing if Abbott tries to buy back some popularity by spending big in this year's budget".

Such comments reveal a weak understanding of the macro-economic basics. The budget isn't the economy. They're quite separate things and the fate of the economy matters far more that the fate of the budget and the size of the government's debt.

Getting the budget back to surplus within a year or two wouldn't make the economy grow any faster. In fact, it would make growth much slower. You'd have to let budget deficits roll on for at least another decade before you got to the point where it was damaging the economy.

Its main downside would be a level of public debt so high it made the government reluctant to add to it by using the budget to stimulate the economy out of a recession. At some point the government's credit rating might be downgraded, but the fear of downgrades is exaggerated. Its blow to the government's ego would be greater than the cost to taxpayers or the economy.

The budget and the economy are interrelated, of course, but it's a two-way relationship. People know the budget affects the economy: cut taxes and increase government spending and you'll make the economy expand faster; raise taxes and cut spending and you'll slow the economy down.

The bit many don't get is that the economy also affects the budget. Stronger growth in the economy leads to faster growth in tax collections and so reduces a budget deficit, whereas slow growth hits tax collections and so worsens a budget deficit.

That's where we are now. The prospective budget deficits over the coming three or four years are now much higher than they were when Joe Hockey took over as Treasurer. That's partly because of the budget measures blocked by the Senate, but mainly because commodity prices have fallen much more than expected and tax collections are growing much more slowly than expected.

The point is, to start slashing and burning in this year's budget would give the economy another kick in the guts, which would slow growth even further and probably make the deficit bigger rather than smaller.

This is precisely why, contrary to popular impression, the big cuts proposed in last year's budget weren't intended to really kick in until 2017, by which time it was hoped the economy would be back to growing strongly.

We now know the return to strong growth will be delayed. That's why the Reserve Bank cut interest rates again. But even the Reserve admits that, at such low levels, monetary policy isn't as effective as it was in stimulating growth.

That's why what we should be thinking about is whether the budget ought to be used to support the economy further by investing in more infrastructure projects.