How the economy helped change marriage

I've never been impressed by those economists who think they can use their little pocket model of the economy to explain every aspect of life. Who want to understand the search for a partner by thinking of marriage as a market. Who think the only motivation – the only emotion – is the desire to make a buck.

On the other hand, if economics is, as one great economist said, the study of the daily business of life, if none of us could exist without the wherewithal to pay for food, clothing, shelter and much else, if most of us have to work to earn that wherewithal, and if most of our time is devoted to producing and consuming, then it's hardly likely that big changes in the economy and education and technology have no effect on such things as marriage.

(While I'm on the topic, I'm never impressed by people who profess to have a soul above such a venal and boring subject as economics. Just threaten to cut their income and see if they're still so uninterested.)

So I thought it worth explaining the theories of two academic economists, Betsey Stevenson and Justin Wolfers. Wolfers is the young Sydney economist, long resident in America, who's most likely to make a name for himself in international economics circles. Already has, really.

Wolfers has taken time off from his job as a professor at the University of Michigan while his partner, Stevenson, is working in Washington as an adviser to President Obama.

Their theory is that economic and social changes have caused the basic rationale for marriage to change from "productive" to "hedonic".

Historically, marriage has been the product of the economic environment of the time. People have used marriage and family to overcome the limitations of the formal economy at the time. Social institutions such as marriage have evolved as economic opportunities have changed and the economy's degree of development has risen.

There was a time – I can remember it – when a number of goods and services, such as freshly cooked meals and childcare, weren't sold in the marketplace. And when keeping house involved long hours of labour.

In such circumstances, it made sense for the family to become the firm producing these household services. It also made sense for the partners to a marriage to increase the efficiency of the "firm" by specialisation.

It was usually the case that husbands, being better educated, were better suited to going out and earning income in the marketplace, while wives had prepared themselves for a life of child-rearing and housekeeping.

Largely unconsciously, young women and men sought out partners they believed would be capable opposite numbers in such a production team.

Then followed, in the lifespan of the Baby Boomers, much technological and social change, all of it with economic implications.

With the invention of a host of "mod cons", housekeeping became a lot less time-consuming and onerous. Cheap imported clothing became available, so people stopped making and repairing their own. More processed foods and takeaways became available.

"While the political emancipation of women is surely a key factor in their movement from the home to the market, deeper economic forces are also at play," Stevenson and Wolfers say.

What came first? The rise of feminism, advances in technology or changes in the economy? Easiest to say they all happened at about the same time and interacted with each other.

Once girls started staying on to the end of school, then going on to uni, things really started to change, in the way partners were selected for marriage and in the things going on in the economy.

With more women wanting to take paid work, the market began supplying things to make that possible: more pre-prepared food, childcare, after-school care, people who mow your lawn, cleaners who can whip through your house in an hour before moving on to the next one.

"While the benefits of one member of a family specialising in the home have fallen, the costs of being such a specialist have risen. Improvements in the technology of birth control have made investing in a wife's human capital a better bet ...

"These greater opportunities also connote a greater opportunity cost for a couple contemplating a stay-at-home spouse," the authors say.

Advances in medicine have yielded rising life expectancy, and the average woman will now spend less than a quarter of her adult life with young children in the household.

By increasing the number of potential years in the labour force, the opportunity cost of women staying out of the labour market to be home with children is higher.

"Rising life expectancy also reduces the centrality of children to married life, as couples now expect to live together for decades after children have left the nest," they say.

With women now better educated than men, we've seen the rise of a human version of "assortative mating": the tendency for people to marry those of the same level of education, even the same occupation.

So what drives modern marriage? "We believe the answer lies in a shift from the family as a forum for shared production, to shared consumption . . .

Modern marriage is about love and companionship. Most things in life are simply better [when] shared with another person.

"We call this new model of sharing our lives 'hedonic marriage'."

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Turnbull’s tax reform striptease has started

Sorry, Malcolm, but it's not adding up. Of course, it's probably not intended to add up just yet. That's what our Prime Minister's still working on. But last week we got a big hint on how we'll be let down gently.

Turnbull replaced Tony Abbott in September with three key tasks to perform: restore the government's popularity by being very different to his bellicose predecessor, make progress in delivering big business's reform agenda, and do better on returning the budget to surplus.

For good measure, he needed to cheer up our business people, whose lack of faith in the economy's future was holding back the recovery in non-mining business investment.

I have no problem with last week's package of measures to encourage innovation, even if there's no assurance most of them will prove effective. We've been promised that Tuesday's mid-year budget update will reveal how their cost of $1.1 billion over four years will be covered.

Turnbull is providing what his predecessor never could, a positive "narrative" of how he, with a few judicious policy changes, is leading us onward and upward to a brighter, more prosperous future. All the talk of innovation is part of that. Fine.

But it doesn't fit. His package of increased spending (and increased tax concessions) doesn't fit with Scott Morrison's rhetoric that increased taxation is unthinkable, so all measures to repair the budget must involve reduced spending.

Nor do his new tax concessions fit with the most basic principle of tax reform: broaden the base to cut the rate.

And even if he does find spending cuts to cover the cost of his new spending, they'll come at an opportunity cost to budget repair. Measures that could have been used to reduce the deficit have instead been used merely to stop it getting worse.

A key tactic in Turnbull's efforts to restore big business's confidence in the government was to announce that all options for tax reform were now back on the table.

Fine. But most of them were mutually exclusive. If you jump one way, that rules out jumping four other ways. In particular, we have at least three competing ways to use the proceeds from an increase in the goods and services tax.

But if Turnbull is to take a tax reform package to next year's election, its details will need to be finalised before the May budget. So we've come to the point where Turnbull must start taking options off the table.

Though it's not clear to many observers which options will go and which survive, it would be surprising if, by now, Turnbull and Morrison hadn't formed a pretty clear idea of where they want to end up.

Almost three weeks ago, my colleague Peter Martin got way ahead of the game – so far ahead it suited not the government, the opposition or the media to admit they'd read his piece – and confidently laid out the various reasons why the government had pretty much decided not to go ahead with any significant changes to the GST.

The first problem was that ownership of the GST had been bequeathed to the states. Why would the feds incur the huge political risk involved in increasing the rate or broadening the base of the GST just to make life easier for the premiers?

But how could they use the proceeds from a GST increase for other purposes without paying a sufficient bribe to the premiers? Fail to do so and the premiers have nothing to lose by opposing the increase.

The other big problem is that increasing the GST is political suicide without adequate compensation to low and middle income earners, but various changes since 2000 have made this very much harder and more expensive.

More than half the gross proceeds from a GST increase would be needed for compensation, with a much higher proportion of it going as increases in welfare spending rather cuts in income tax.

Everything that happened at last week's meetings with state treasurers and premiers was consistent with the thesis that the states have been cut out of the GST inheritance as just the first veil to be removed in the tax reform striptease.

But with a deteriorating budget position, how could the government afford to cut income tax and company tax without having the net proceeds from a GST increase to call upon?

It's obvious, though not easy: broaden the income tax and company tax bases by removing sectional concessions – superannuation, for starters – and use the proceeds to fund a revenue-neutral cut in tax rates.

Not exactly what Turnbull's big-business backers were hoping for.

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Why governments should subsidise innovation

What can governments do to encourage innovation? Well, as we learnt this week, Malcolm Turnbull can think of $1.1 billion-worth of things to do.

His "national innovation and science agenda" involves 24 mainly small spending or tax concession programs, grouped under four headings.

Culture and capital, to help businesses embrace risk and to incentivise​ early-stage investment in start-ups.

Collaboration, to increase the level of engagement between businesses, universities and the research sector to commercialise ideas and solve problems.

Talent and skills, to train Australian students for the jobs of the future and attract the world's most innovative talent to Australia.

And government as an exemplar, to lead by example in the way government invests in and uses technology and data to deliver better quality services.

Will all those programs prove to be money well spent? Who knows? The safest prediction is that some will and some won't.

At present, the government is spending almost $10 billion a year on research and development. This involves about $2 billion on government research activities (mainly the CSIRO), almost $5 billion on grants to university and other research institutions (including medical research), and about $3 billion on tax breaks to business to encourage them to engage in R&D.

We do know a fair bit about the effectiveness of schemes to subsidise business R&D activity, whether in Oz or other countries.

And last week we saw the Australian Industry Report for 2015, produced by the chief economist of the Department of Industry, Innovation and Science, which reported the results of a new study of the effectiveness of the government's R&D tax concession scheme.

But first things first. This week's innovation statement tells us "innovation and science are critical for Australia to deliver new sources of growth, maintain high-wage jobs and seize the next wave of economic prosperity".

Which is nice, but what exactly is it? "Innovation is about new and existing businesses creating new products, processes and business models."

Ah, so that means innovation is just the latest business buzzword for what economists have always called technological advance. That means we can believe the happy chat about how wonderful innovation is.

Economists have long known that most of the rise in our material standard of living over the decades and centuries has come from advances in technology, which include better knowhow as well as better machines.

R&D, the industry report informs us, is the main vehicle for innovation. You wouldn't know it from the cost-cutting efforts of Treasury and the Department of Finance over the years, but economists have long accepted that there's a good case for government spending on R&D and for government subsidy of business spending on R&D.

A business engages in R&D in the hope that it leads to new or improved products and processes which will allow it make more bucks. They don't do it because they're nice guys but, even so, the rest of us benefit from their contribution to technological advance.

This means R&D has the characteristics of a "public good" – a good (or service) that's "non-excludable and non-rivalrous". You can't exclude me from using it (which means you can't charge me for using it) and my use of it doesn't interfere with other people's use of it.

Trouble is, public goods are a major instance of "market failure". We obviously benefit greatly from public goods  – particularly because they're non-rivalrous  – and so would benefit from them being produced in large quantity.

But we can't rely on the market  – profit-motivated businesses  – to produce as much of them as we'd like. Why not? Because they're non-excludable. Because too many people can use them without paying.

Economists call this the "free-rider" problem. They also say public goods generate "positive externalities"  – benefits that go to people even though they weren't a party to the original transaction between seller and buyer.

Where market failure can be demonstrated, you've made the case for government intervention in the market to correct the failure by "internalising the externality"  – always provided the intervention doesn't end up making matters worse, which these days is called "government failure".

So economists have long accepted the case for government to subsidise private R&D because this will benefit all of us, not just the business that gets the subsidy.

Of course, this is just theory. It's worth checking to see if our government's R&D tax concession really does produce positive externalities. Does the knowledge generated by the subsidised firm really "spill over" to other firms? And, if so, what can we learn about how this works?

To answer these questions the Industry department made available to Dr Sasan Bakhtiari and Professor Robert Breunig, of the Australian National University's Crawford School of Public Policy, data from its administration of the R&D program.

The program began in 1985, but the data used was from 2001 to 2011, during which time the number of participants grew from less than 4000 firms to more than 9000.

The program was open to firms in all industries, but the main industries using it were manufacturing, professional and scientific services, mining, and information media and telecommunications.

The researchers found evidence of significant spillovers of knowledge to particular firms from firms in the same industry, their suppliers, their client firms and from universities. Significantly, these spillovers came from outfits located within 10 km of the receiving firm, except in the case of suppliers, which were located more than 250 km away.

This leads the researchers to conclude, in line with other research, that knowledge spillovers from competitors and client firms mostly occur through face-to-face contacts between the R&D staff of the two firms.

So now you know why firms in the same business tend to cluster together, why that's a good thing and also, perhaps, why more and more of the nation's economic activity happens in or near the central business districts of our capital cities.

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The best economists know the market is flawed

As almost every economist will tell you, the market economy – the capitalist system, if you prefer – works in a way that's almost miraculous. All of us owe our present prosperity to it.

Think of it: each of us in the marketplace – whether we're buyers or sellers, consumers or producers – is acting in our own interests. A butcher sells us meat not to do us a favour, but to make a living. We, in turn, buy our meat from him not to do him a favour, but to feed ourselves.

That's how market economies work: everyone seeks to advance their own interests without regard for the interests of others. It ought to produce chaos, but doesn't.

Somehow the market's "invisible hand" has taken all our selfish motivations and transformed them into an orderly, smooth-working system from which we all benefit. The butcher makes her living; we get the meat we need.

Heard that story before? It contains much truth. But not the whole truth. Business people, economists and politicians often use it to imply that everything that happens in a market economy is wonderful.

Or they use it to argue that the best way to get the most out of a market economy is to keep it as free as possible from intervention by meddling governments. We should keep government as small as possible and taxes as low as possible.

But market economies aren't always orderly and smooth working. They move through cycles of wonderful booms but terrible busts.

And it's not true that "all things work together for good". A fair bit of the self-seeking behaviour of producers isn't miraculously converted into consumer benefit.

I've been reading a book called Phishing for Phools, a play on the online practice of phishing: posing as a reputable company to trick people into disclosing personal information.

The authors say that "if business people behave in the purely selfish and self-serving way that economic theory assumes, our free-market system tends to spawn manipulation and deception.

"The problem is not that there are a lot of evil people. Most people play by the rules and are just trying to make a good living. But, inevitably, the competitive pressures for businessmen to practice deception and manipulation in free markets lead us to buy, and pay too much for, products that we do not need; to work at jobs that give us little purpose; and to wonder why our lives have gone amiss."

You're probably not terribly surprised to read such sentiments. The surprise is that they're being expressed by two economics professors, George Akerlof, of the University of California, Berkeley (and husband of the chair of the US Federal Reserve), and Robert Shiller, of Yale University, who are held in such high regard by their peers that they're separate winners of the Nobel prize in economics.

They say they wrote the book as admirers of the free-market system, but hoping to help people better find their way in it.

If competition between business people too often induces them to manipulate their customers, why do we so often fall for it? Because though economists assume we always act in our own best interest, psychologists have convincingly demonstrated that people frequently make decisions that aren't in their best interest.

The market often gives people what they think they want rather what they really want. The authors point to common market outcomes that can't possibly be wanted.

One is a high degree of personal financial insecurity. "Most adults, even in rich countries, go to bed at night worried about how to pay the bills," they say. Too many people find it too hard to always resist the blandishments of marketers so as to live easily within their budgets.

It was all the phishing for phools in financial markets – people were sold houses they couldn't afford; people sold securities that weren't as safe as they were professed to be – that led to the global financial crisis and the Great Recession that hurt so many.

Then there's the way processed foods from supermarkets and food sold by fast-food outlets and restaurants come laced with the health-harming things they know we love: salt, fat and sugar.

The authors say a great deal of phishing comes from supplying us with misleading or erroneous information. "There are two ways to make money. The first is the honest way: give customers something they value at $1; produce it for less.

"But another way is to give customers false information or induce them to reach a false conclusion so they think that what they are getting for $1 is worth that, even though it is actually worth less."

Another class of phishing involves playing psychological tricks on us. According to the research of the American psychologist Robert Cialdini, we're phishable because we want to reciprocate gifts and favours, because we want to be nice to people we like, because we don't want to disobey authority, because we tend to follow others in deciding how to behave, because we want our decisions to be internally consistent, and because we are averse to taking losses.

There's no better way to organise an economy than by using markets. But market outcomes are often far from perfect and we need governments to regulate them as well as offset some of their worst effects.

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Broken public service leads to broken governance

There's no bigger question in politics today than why our governance has become so bad. Why our discussion of policies is so superficial and how any government could come up with so many ill-considered policies as we saw in Tony Abbott's first budget.

No doubt the answer has many parts, but the more I think about Laura Tingle's Quarterly Essay, Political Amnesia, the more I think she's identified a key but neglected part of the explanation.

She says our politicians and public servants have forgotten how to govern. In particular, the public service has lost much of its policy expertise – including its memory of what works and what doesn't.

And the politicians have forgotten that they can't do their job to the electorate's satisfaction without the guidance of an expert public service. That's what the bureaucracy is for.

Relations between the politicians and their bureaucrats are so little discussed by the media that I suspect many people still have a Yes, Minister view of what goes on in Canberra: the public servants pretend to be the servants of the politicians, but they're actually the bosses. Government is run by a bunch of Sir Humphreys who manipulate their ministers, pollies who come and go without making much difference.

It did indeed work like that in Canberra as well as Whitehall, but that's been becoming less and less true since the 1970s. By now it's the very opposite of the truth. These days, ministers and their private office advisers have most of the power and their departments have surprisingly little.

I might have said Treasury was the major exception to the new rule, were it not for the unprecedented disaster of the 2014 budget.

No influential Treasury and Finance departments could have handed their political masters such a booby trap. It had to be largely the pollies' and their advisers' own incompetence.

The move from Yes, Minister to Be It On Your Own Head, Minister has come in stages, starting with the decision of the Whitlam government to allow ministers a much greater personal staff of (unaccountable) policy advisers and media managers. The Fraser government perpetuated this "reform" with enthusiasm.

The Hawke-Keating government's main contribution was to replace "permanent heads" of departments with department secretaries on five-year contracts. After five years heading one department you'd be moved to heading another.

Thirty-odd years of this and now senior bureaucrats rarely stay long in any department, but climb the ladder by moving from department to department.

They've gone from being long-experienced experts in particular policy areas to "universal managers". I may not know much about health or finance, but I know how to run a department. Great.

It was John Howard who, on coming to government, immediately sacked many department heads. Abbott did the same on a smaller scale, but even sacked the secretary to the Treasury (and his likely successor).

Their purpose was not so much to "politicise" the public service as to scare hell out of the other department heads: toe the line, don't give fearless advice. And don't get identified with a controversial policy the other side may take exception to.

The plain fact is the Libs neither like nor trust the public service, the last bastion of the hated union movement. They've largely given up the practice of having many of the jobs in ministers' offices done by people on secondment from their department.

They've been replaced by young bossyboots hoping for a career in politics, who know more about partisanship than policy and are more inclined to listen to lobbyists.

Add to this the annual, deeper, across-the-board cuts in departmental budgets – ironically known as "efficiency dividends" – and you end up making many policy experts and repositories of corporate memory redundant.

The result is that many departments are weak on policy – there was a time when officers in Finance knew where each department's bodies were buried – and have to call in expensive consultants, who act like they know more than they do. The part of Treasury responsible for tax reform has lost a third of its staff.

Last year's budget and the fate of its progenitors stand as a lasting monument to the folly of running down the bureaucracy's policy-making capacity and limiting its role in policy formation in favour of young amateurs with a party pedigree.

Fortunately, there are signs Malcolm Turnbull has learnt this lesson. He has just appointed his former department secretary in Communications as his chief-of-staff, and brought sacked Treasury secretary Dr Martin Parkinson in from the cold to be secretary of Prime Minister and Cabinet.

He's too smart to think he doesn't need the bureaucrats' advice.

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Economy's transition grinds on, despite quarterly bumps

What an exciting week it's been for lovers of thrills and spills in the economy. This time three months ago they were telling us it was near to subsiding into recession in the June quarter, but now they're telling us it took off like a rocket in the September quarter.

Phew, what a miraculous escape. Or what a load of cods, brought to us by those who've learnt nothing from years of watching the national accounts' gyrations in real gross domestic product from one quarter to the next.

You can either take those gyrations literally, or you can "look through" them, hoping for a better idea of what's really happening in the economy. The advantage of the first approach is that it's a lot more exciting. The disadvantage is that it convinces the public that economists know nothing and aren't to be trusted.

Let's take the story back a further three months to the March quarter. The literalists told us the economy was growing strongly because the Bureau of Statistics announced a first stab at growth in the quarter of 0.9 per cent.

Then we get growth slumping to 0.2 per cent (since revised to 0.3 per cent) in the June quarter, and now we get it soaring by another 0.9 per cent last quarter.

If you had a better feel for arithmetic than the literalists, you might think that, since the March quarter increase was a lot bigger than could have been expected, it wasn't all that surprising the June quarter increase was a lot smaller than could have been expected.

And since the June quarter increase was a lot smaller than could have been expected, it wasn't all that surprising the September quarter increase was a lot bigger than could have been expected.

It's notable that the component of GDP that explained most of the weakness in the June quarter also did most to explain the strength in the September quarter: the volume of exports.

Export volumes grew by an unusually strong 3.7 per cent in the March quarter, then fell by 3.3 per cent in the June quarter, then grew by an unusually strong 4.6 per cent in the latest quarter.

This tells us little about what was happening in the wider economy. Rather, it tells us how climate change is playing havoc with the bureau's seasonal adjustment process.

Huh? Export volumes have been growing mainly because all our new coal and iron ore mines are coming into production. Seasonally adjusted exports of coal were up in the March quarter because there were fewer cyclones than usually happen at that time of year.

They were down in the June quarter because the weather was much worse than usual. And why did they rebound in the September quarter? You guessed it: the weather was better than normal.

So those economists warning that our strong GDP growth in the latest quarter is unlikely to represent the start of a better growth trajectory are no doubt right.

But those people arguing that, since the growth in exports last quarter accounts for more than all the growth in GDP in the quarter, the domestic economy obviously went backwards and so must be very weak, aren't making a sensible comparison.

It's not sensible to give the "domestic economy" no credit for all the export growth our miners are generating, while making it bear the full burden of the sharp fall in mining investment spending.

No, to get a better idea of how the great "transition" to broader-based growth is progressing, it makes more sense to divide the economy between the mining and mining-related sector, and the rest of the economy.

Doing this shows that, whereas the latest accounts say the overall economy grew by 2.5 per cent over the year to September – a quite believable figure – the non-mining economy grew by about 3 per cent.

That is, when you put all the elements of mining together – the growth in its production and exports, the fall in its investment spending and the associated fall in imports of mining equipment – you find that, rather than accounting for more than all of it, mining is actually subtracting from overall growth.

To get a better handle on what's happening inside the non-mining sector, the Reserve Bank reported in its latest statement on monetary policy an exercise where it set aside mining – and agriculture – and divided the rest of the economy into three sectors.

First was the "goods-related" sector, composed of manufacturing, construction, utilities and distribution (transport, wholesale and retail trade). Second was the "household services" sector, including health, education, hospitality and recreation.

Third was the "business services" sector, including professional and scientific services, finance and insurance, hiring and real estate, and information and telecommunications.

The rate of growth in the household services sector has increased considerably over the past few years. It has experienced increased employment and job vacancies over the past year or more.

The rate of growth in the business services sector has picked up a bit, to be about average. It has experienced a recovery in job vacancies and employment.

So the economy's huge services sector is doing reasonably well. It's the goods-related sector where output growth remains weak, little changed for more than two years. Vacancies and employment have been little changed for about three years.

Thus there's been an accelerated shift from goods to services. And since services are more labour-intensive, while the goods-related sector is more capital-intensive, this explains why non-mining business investment has yet to recover.

It also explains why, economy-wide, we've enjoyed above-average growth in employment in spite of below-average growth in GDP for the past year or more.

So the transition to broader-based growth is proceeding. And once the huge fall in mining investment spending has come to an end, our growth figures should look a lot better than they do now. That, too, is just arithmetic.

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Times get tougher for the oldies

Glenn Stevens, governor of the Reserve Bank, is used to getting letters from angry citizens. Aside from the ones demanding to know why the Reserve can't solve all our problems by just printing more money, in days past most would have come from small-business people complaining about the latest increase in the official interest rate, which had taken their overdraft rate to ruinous levels.

These days, most come from angry retirees complaining about yet another cut in rates. Doesn't he realise people are trying to live on the interest on their savings?

That's the trouble with interest rates, of course, they cut both ways – a cost of borrowers, but income to savers. The media assume we're all borrowers, so they boo rate rises and cheer rate cuts, adding insult to the oldies' injury.

Like all central banks, the Reserve raises interest rates when it wants to slow the economy by discouraging borrowing and spending, and cuts rates when it wants to speed things up – as now. It jumps that way because households' and businesses' debts total a lot more than their savings.

When I was a young economic journalist in the 1970s, the retired were always complaining about high inflation. Their cost of living was rising rapidly, but they had to live on "fixed incomes" that didn't keep pace.

We eventually solved that problem. Interest rates caught up with higher inflation and, as well, we moved to adjusting pensions regularly in line with prices and then with wages. By the early 1990s we finally had inflation back under control.

How times change. These days, most people retire with superannuation or other savings, which they use to supplement – or occasionally replace – their pension. And since they need to live on the earnings from their savings, they need those earnings to be steady, not go up and down like the share market.

Thus the retired like to put most of their savings in interest-bearing bank accounts, term deposits or pension funds that have most of their money in bonds. So these days a lot of retired are back to living on "fixed incomes", meaning they hate to see interest rates falling.

Our official interest rate is down to 2 per cent, a record low, having been cut 10 times since late 2011. The rates paid to savers are only a little higher. Even so, our rates are relatively high compared with most advanced countries. They're near zero in most developed economies, and in parts of Europe you actually have to pay the bank a tiny percentage to persuade it to hold your money.

I'll let you into an open secret: Stevens will be retiring as governor next September, though since he'll only be 58 – just a boy, really – I doubt he'll be putting his feet up.

He said a few things last week that make you think he's turning his mind to retirement. And he doesn't like what he sees.

"My guess is that global interest rates are still going to be very low for a good part of the decade ahead," he told the Australian Business Economists.

It's likely the US Federal Reserve will raise its official interest rate a fraction this month. But Stevens doesn't see US rates rising far. The European Central Bank and the Bank of Japan were "a long way from even thinking about higher interest rates". And the Europeans are openly contemplating further cuts.

So the average official interest rate in the major money centres may be very low for quite a while, he said.

Trouble is, "in a low interest-rate world, the problems of providing retirement incomes will become ever more prominent".

The very low level of yields (returns) on government bonds and other fixed-interest securities means the prices of such securities are very high (it was actually rising bond prices that caused yields to go so low).

So these days it costs you or your pension fund a lot just to buy securities that pay such low amounts of interest. Which is another way of saying you now need to retire with a lot more savings than you did to maintain a given standard of living.

Added to that, we're living longer and so need our savings to last longer.

Stevens said the retiree can, of course, respond to the reduced attractiveness of fixed-interest securities by holding more of her savings in dividend-paying shares. This involves accepting more risk of volatility, of course.

Certain well-known Aussie companies pay big, steady dividends, which usually come with refundable income tax rebates (known as franking credits) attached. Most people would also be hoping to see these dividends grow over time, as inflation continues.

"It certainly seems that many Australian listed corporates feel the pressure from shareholders to deliver that, even some whose earnings are inherently volatile," Stevens said.

Can the corporate sector realistically promise growing dividends over a long period? Not without being prepared to take on greater risk by investing in new projects.

"How much of that risk an older shareholder base will allow boards and managements of listed entities to take is an important question," he said.

"Overall, in a world where a bigger proportion of the population wants to be retired and living (even if only in part) off the return on their savings, those returns are likely, all other things equal, to be lower."

A good argument for delaying retirement.

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Let’s not repeat our many competition stuff-ups

The belief that increased competition leads to greater efficiency and higher productivity is one of the articles of faith for admission to the economic priesthood.

Economic practitioners often know little about the peculiarities of particular markets – about their specific areas of market failure – and often don't think they need to know because what they do know about is their profession's two magic answers to inefficiency.

The first is to "get the incentives right" (the claimed rationale for much tax reform) and the second is to increase competitive pressure.

There's a lot of truth to both propositions, but not as much as it suits economists to believe. Because it comes from their model of markets, many economists' belief that the more competition the better – and the more choice the better – is so deeply ingrained it requires no empirical confirmation.

This makes economists chronic sufferers from what psychologists call "confirmation bias" – they make a mental note of all the examples they see that seem to confirm their pre-existing views about how the economy works, but quickly forget those examples that don't.

So when the Turnbull government confidently asserts that implementing the many recommendations of Professor Ian Harper's review of competition policy will do much to lift the economy's rate of productivity improvement, few economists are inclined to demur.

Many of the reforms Harper proposes make much sense: ending the protection of chemists, coastal shipping and the owners of taxi licences and intellectual property, rationalising the pricing regimes for roads and water, and changing to an "effects test" in trade practices law.

Initially, Harper wanted deregulation of liquor licensing laws, but pulled back when economists who did know about the market failures in the area showed him evidence of the significant "negative social externalities​" (e.g. people getting bashed outside pubs) associated with alcohol consumption. Who knew?

Unfortunately, Harper's church-going ways haven't helped him appreciate the potentially adverse effects on family life – family life? Why would an economist know or care about family life? – arising from further deregulation of retail trading hours.

We'll see how many of Harper's braver proposals are actually implemented. In any case, most of them are up to the premiers, not the feds.

But the most potentially alarming is Harper's proposal that the principles of competition policy be extended to the domain of "human services" – healthcare, education and community services – which is mainly the responsibility of the states.

There's no denying that health and education are areas of huge government spending and economic significance, replete with inefficiencies and ineffectiveness. They ought to be much higher on the reform agenda than yet more tinkering with the tax system and the wage-fixing rules.

But to frame them as part of competition policy is an old economists' trick: take an area that's always been outside the marketplace and marketise​ it. Take the world as it is and make it more like the textbook assumes it to be.

Apply the economists' two magic answers – getting the incentives right and introducing competition and choice – and everything will fix itself without the economists ever needing to come to grips with the causes of the particular inefficiencies that are causing the problem.

Brilliant. But often disastrous. Think of the string of stuff-ups that have followed the econocrats' efforts to contract-out the provision of government services.

Think of the allegations of widespread rorting by operators of the job services network that replaced the Commonwealth Employment Service.

Think of the way contracting-out of childcare services allowed the rise and collapse of ABC Learning, at great cost and inconvenience to parents and taxpayers.

Think of last week's collapse of Vocation Ltd and the much wider rorting of the misguided experiment with profit-motivated provision of higher education. Federal and state "reformers" are totally stuffing up vocational education in response to the problems with TAFE.

Think of all the money federal taxpayers have pumped into private schools in the sacred name of choice, without any evidence of this wider competition leading to higher standards of education on either side of the fence.

Think of all the effort put into the MySchool website to promote choice and competition while our scores continue to slide on the international indicators of literacy and numeracy.

Even the pink batts scheme is an example of the disaster – and death – that can follow when you naively give profit-motivated business people a pipeline into government coffers.

Sorry, econocrats. If you want to achieve genuine improvements in the delivery of health and education and community services, you'll have to try a mighty lot harder than applying magic answers.

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GDP slows as population slows

When is slower economic growth not such a bad thing? When it's caused by lower growth in the population.

If that puzzles you, you're a victim of the economists' practice of focusing on growth in gross domestic product rather than GDP per person.

Nigel Ray, a deputy secretary of Treasury, acknowledged in a speech to the Australian Business Economists this week that last financial year, 2014-15, the economy recorded its third straight year of below-trend growth.

"This means Australia is now in a prolonged period of below-par growth, the likes of which we have rarely seen outside of a recession," he said.

We'll be seeing the national accounts for the September quarter on Wednesday, but they're unlikely to show much improvement.

Reserve Bank heavies have been hinting at it for months, but this week Ray made it official: the economy's trend rate of growth is actually lower than the econocrats had been assuming in recent years.

But what exactly is "trend" growth? Good question because there are actually two versions of it (or three if you include the Bureau of Statistics' practice of referring to its smoothed seasonally adjusted estimates as "trend" estimates).

The backward-looking version of trend is the economy's average actual rate of growth over past 10 years or more. Since 1976-77, for instance, real GDP has grown at an average rate of 3.1 per cent a year.

If nothing in the economy ever changed, the backward-looking version of trend would be the same as the forward-looking version, but things do change.

The future trend rate of growth is also known as the economy's "potential" rate of growth, the maximum rate at which it can grow over the medium-term – periods of five or 10 years or so – without causing a big problem with inflation.

The economy's potential rate of growth is the rate at which its ability to produce goods and services is growing.

This, therefore, refers to the supply side of the economy. The supply side involves combining the economy's three "factors of production" – land, labour and capital – to produce goods and services.

Here, "land" includes natural resources and "capital" means man-made, physical capital, such as buildings and equipment, but also roads and other public infrastructure.

But the economists' custom is to view the economy's supply side – its capacity to produce goods and services – through the perspective of just one factor, labour.

So the economy's potential output is seen as being determined by "the three Ps": population, participation and productivity. Potential growth in production is determine by growth in the population of working age (everyone 15 and over) plus change in the rate at which people of working age choose to participate in the labour force by working or seeking work, plus growth in the productivity of labour (average output per hour worked).

Of course, the economy's potential to supply goods and services is only half the story. How much is actually produced in any period will be determined by the demand for goods and services at the time.

Demand can't exceed supply (when it tries, the excess demand that can't be satisfied from imports just forces prices up), but it can fall short of potential supply. When it does, labour is unemployed or underemployed (people not working as many hours as they want to) and factories and offices have idle capacity.

That's the position we've been in for the past three years: the growth in our demand for goods and services has been falling short of the growth in our potential to supply them. So when the econocrats say growth has been "below trend", that's what they mean.

And every year that actual output falls short of our potential output we get a widening in what economists call "the output gap", which will be manifest in rising unemployment or underemployment as well as unused production capacity in factories and offices.

Whereas we usually think of potential output as an annual rate of growth, the output gap is measured as the difference between the absolute levels of potential and actual output.

The size of the output gap is an indicator of the failure of the managers of the macro economy to achieve their goal of keeping its actual growth in line with its potential growth – that is, to keep it growing at full capacity or "full employment" (of all the factors of production, not just labour).

The continued existence of the business cycle means they can never achieve this goal, of course, but it's still their job to try.

The size of the output gap is also a measure of the extent to which a recovering economy can for a few years grow faster than its trend (potential) rate without that causing any inflation problem. A period of above-trend growth is actually the only way to eliminate the output gap and get the economy back to growing at its full-employment rate.

For some years the econocrats' estimate has been that the economy's potential or (forward-looking) trend rate of growth is 3 per cent a year, compared with its actual growth over the year to June of 2.3 per cent.

Ray said this includes an assumption that the working-age population grows by 1.75 per cent a year, its actual rate over the past 10 years. But now actual growth has slowed to 1.5 per cent because of a decline in holders of temporary visas and lower net migration from New Zealand.

So Treasury has cut its estimate of trend (potential) growth to 2.75 per cent, thereby reducing its estimate of the size of the output gap.

Why is this not such a bad thing? Because, although the growth in workers helping to produce goods and services is likely to be lower than we thought, there'll also be fewer people we have to share those goods and services with. GDP per person shouldn't be much affected.

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Oldies looked after while young don't notice

If I was going to wander around the inner city chalking messages on the pavement in copperplate, they wouldn't say Eternity. They'd say Wake Up. Why? Because, contrary to rumour, the Nanny State doesn't exist.

If you fail to pay attention because you assume that the market economy will always deliver you a square deal, you're heading for disillusionment. If you think it's the government's job to ensure no one ever rips you off, you have much to learn.

Indeed, it's just as likely to be the pollies who decided to short-change you when they realised you were too busy watching reality television to notice.

Take the great debate about tax reform. Now the best-informed are telling us the government has thought better of changing the goods and services tax, I fear the debate will turn in a distinctly more boring direction – to reducing the generosity of tax concessions for superannuation.

Mention super and everyone over 50 pricks up their ears, while everyone under 50 wonders what's on telly tonight. To date, that's meant that the over-50s have been looked after at the expense of the under-50s.

To date, the debate over super tax concessions has been about their rapidly growing cost – about $25 billion a year in reduced tax collections – and the fact that the lion's share of this loss to the budget goes to high-income earners (like me). That is, it's a question of fairness between rich and poor.

But in their latest paper on super tax concessions, to be released on Wednesday, John Daley, Brendan Coates and Danielle Wood, of the Grattan Institute, argue that the reform of super can also be advocated on the grounds of fairness between the old and the young.

It's not something often talked about, but our budget and social security arrangements – as with all advanced economies – have a "generational bargain" built into them.

The bargain is simple: except perhaps for the period when they're raising a family, people of working age generally pay more in tax than they get back in benefits, with the difference used to provide those who are too old to work with a lot more in benefits than the little they pay in taxes.

Since we all expect to get old one day, this was regarded as a quite fair bargain between the generations. And until recently, paying for it all wasn't a big problem, because the number of workers was growing a lot faster than the number of oldies.

What's changed is the ageing of the population and the retirement of the baby boomers, which means the number of oldies needing to be supported from the budget has started growing a lot faster than the number of workers.

But Daley and his co-authors point out that it's not just demography that's undermining the generational bargain. The politicians have been making it worse by increasing the generosity of benefits to the old.

In Australia's case, John Howard was always slipping extra benefits to the alleged "self-funded retirees", who he regarded as a key part of the Liberal heartland. He gave them the senior Australians tax offset and made it easier for them to get health cards and the pensioners' rate for pharmaceutical benefits.

Then Peter Costello came along and made a lot of supposedly self-funded people eligible for a part pension, as well as making super payouts completely tax-free for people over 60.

Not to be outdone, Kevin Rudd granted pensioners a big discretionary increase on top of regular indexation to average weekly earnings.

Daley and his colleagues show that the largest increases in government spending have been on healthcare (where federal and state governments spend twice as much on each 60-year-old as on a 30-year-old) and the age pension.

"Both of these spending categories grew substantially faster than gross domestic product, not because of the ageing of the population, but because of explicit and implicit choices to spend more per person of a given age," they say.

In 2010, and after removing the effect of inflation, the two levels of government spent $9400 a year more per household over 65 than they did six years earlier. At the same time, the average amount of income tax paid by those 65 and over fell in real terms, despite an increase in incomes.

This generosity has been funded by running budget deficits and borrowing to cover them. Who'll be paying the interest on that debt? Not the oldies.

Over the past decade, according to Grattan's calculations, older households captured most of the growth in Australia's wealth. Households aged between 65 and 74 years today are $400,000 (or 27 per cent) wealthier in real terms than households of that age 10 years ago.

Meanwhile, the wealth of households aged 25 to 34 years fell by $2000 (or 4 per cent).

This is partly explained by rising house prices, of course. Older households are far more likely to own their home than younger households. And, of course, the value of their home is ignored when assessing their eligibility for an age pension.

If the young do take an interest in the reform of super tax concessions, they'll find they're being asked to agree to exclude themselves from the largess being enjoyed by the older generation. But until a halt is called, the generational unfairness will keep worsening.

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