The prospect for workers is brighter than many think

A lot of people are convinced it's just going to get worse and worse for workers in coming years. A lot of oldies think that and, unfortunately, too many youngsters believe them.

Many older people worry that, with the decline of manufacturing in Australia, and the end of the mining boom as well, they just can't see where the jobs will come from.

Young people, on the other hand, believe jobs are getting ever harder to find and, when you do find one, it's likely to be pretty scrappy: casual, part-time, short-term.

What's true is that young people have borne the brunt of the weak economic and hence employment growth since the financial crisis in 2008.

It's taking them longer to find entry-level full-time jobs than it used to and, in the meantime, they've had to get by with casual jobs. More employers have been willing to exploit them by asking them to do unpaid internships.

What's not true is that there's been continuing growth in insecure forms of employment. The proportions of such jobs haven't been increasing.

At a time of "transition" and uncertainty, it's always easy to err on the gloomy side. When you do, be sure the media will broadcast your bad vibes to the world.

But it's not hard to see plausible reasons why things could get better for workers, not worse. And when the ANZ Bank's chief economist unit and the Australian Institute for Business and Economics, at the University of Queensland, peered into the future and ran their best guesses through a model of the economy, that's just what they found.

Everyone loves to dwell on the decline in manufacturing, and the pathetic number of lasting jobs in mining, but few people get excited by the truth that almost all the additional jobs we've created in the past 40 years have been in the services sector.

Nor that most of these jobs have been cleaner, safer, more highly skilled and more rewarding – intellectually as well as monetarily – than most of the jobs no longer being created in manufacturing, farming and mining.

The study makes the highly plausible assumption that this longstanding trend will continue. "Declining material intensity has been observed in all [developed] countries, in part because wealthier consumers buy 'experiences' once their primary material needs are met," it says.

The ageing of the population is almost invariably portrayed as a bad thing, but the study points to a widely ignored way in which it's good news for the younger generation.

With a higher proportion of the population retired (and thus adding to the demand for labour but not to its supply) but low fertility meaning a lower rate of young people entering the workforce from education, demand for the services of young workers will increase.

Here's a tip: employers are chancers​. If they think they can get away with screwing workers (because there are more than enough available) they will. That's what's been happening lately.

But if they don't think they can get away with it (because workers have plenty of other bosses who'd like their services), they don't. And if it gets to the point where bosses have to start sucking up to workers to attract them and hold them, they will.

The study puts it more politely. By their nature, service industries rely less on machines and more on people, particularly highly-skilled workers. So if the services sector's share of the economy continues to grow "this could prove challenging for Australian businesses given our ageing population and changing workforce composition".

A third factor the gloom-mongers neglect is that our continuing move to the "knowledge economy" requires a better-educated, more highly-qualified workforce.

Today, more than half the population has completed the last year of schooling and gained at least a post-school certificate. That's more than twice what it was in 1981.

Since the oldest Australians have the lowest levels of educational attainment, the proportion of people with post-school qualifications could exceed 70 per cent by 2030.

Even so, the study predicts that "the fight to retain skilled workers will intensify", implying that, though the supply of qualified workers will grow, the demand for their services will grow faster.

In such circumstances, employers will be trying to bind their skilled workers to them, not cast them adrift with insecure employment contracts.

If we foresee further growth in the share of the economy accounted for by labour-intensive service industries, employing better qualified and higher-paid workers – over whose bodies employers are fighting – labour's share of national income should rise.

If so, "some of the consequences of a falling labour share, such as growing income inequality, may begin to unwind as well", the study says.

A final factor to remember is that our exports of services are likely to keep growing as Asia's middle class gets bigger and more prosperous.

At present, the goods sector of the economy (agriculture, mining, manufacturing and construction) accounts for 28 per cent of total employment, while the services sector accounts for 72 per cent. The study predicts that, over the next 15 years, the services share will increase by 5 percentage points.

It finds that the industries with the most intensive demand for labour are also those with the strongest growth prospects.

The strongest growing service industries are likely to be healthcare (fed by demand for new medical technologies as well as ageing), education (growing demand for qualifications) and professional services.

These industries are projected to grow by at least 5 per cent a year, on average, over the next 15 years. Demand for labour across the economy is projected to grow by an average of a solid 1.6 per cent a year.

No one – certainly, no economist – knows what the future holds. But don't be led into assuming the only things that could happen are bad.

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An independent assessment on negative gearing

Labor claims its "reforms" to "negative gearing" would do wonders to make home ownership more affordable for our kids. But Malcolm Turnbull says vote for high-taxing Labor and the value of your home will crash, while rents soar.

Many voters have strong views for or against negative gearing. But when rival politicians fall to arguing about their policies, most of us find we don't know enough to decide who's right.

We need someone we can trust to act as a kind of umpire, pronouncing on who has the better case. So we're fortunate to have John Daley and Danielle Wood, of the independent Grattan Institute, issuing a report on the topic.

For defenders of negative gearing, it's bad news. The pair explain that there's a good case for acting against the practice, dismissing alarmist claims it would disrupt the property market.

For opponents of negative gearing, however, the news isn't as good as it seems. Since the resulting reduction in house prices isn't likely to be great, acting against the practice wouldn't do much to make home ownership more affordable.

Investment in a rental property is negatively geared when so much of the cost of the property has been borrowed that the interest bill and other expenses exceed the earnings from rent.

Why would anyone deliberately structure an investment to run at a loss? Partly because they can deduct that loss from their income from other sources, thus reducing their tax.

But that means they're still out of pocket for the remaining half or more of the loss. Why do that? Because they're hoping eventually to sell the place at a big capital gain, which should more than make up for the after-tax losses they've incurred.

That's been more likely since 1999, when the Howard government introduced a 50 per cent discount on the rate of tax on capital gains.

Daley and Wood disprove the dishonest claims that negative gearing is used by many people on modest incomes to get ahead. There may be a few of them, but the statistics show high income earners claim the lion's share of the benefits.

The authors say there's no point of principle that supports our longstanding practice of allowing losses on property investments to be charged against wage income for tax purposes.

Very few other countries do this. It makes the housing market more volatile and reduces home ownership. It diverts capital from more productive investments while doing little to increase the supply of homes.

They propose allowing losses on property investments to be deducted only against income from other investments, not against wages. This would save the budget $2 billion a year in the short term, falling to $1.6 billion a year as behaviour changes.

But much of the attraction of negative gearing comes from its connection with the 50 per cent discount on the taxing of capital gains.

They say there is a case for taxing capital gains more lightly than other income – mainly because much of the seeming gain comes just from the effect of inflation, which makes it illusory – but this doesn't justify a discount as great as 50 per cent.

Allowing such a high discount (as well as allowing rental losses to be deducted against wage income) greatly reduces the government's tax collections, meaning it has to rely more heavily on other taxes. Those other taxes often do more to distort economic behaviour than taxing saving does.

In any case, empirical evidence shows people on high incomes save almost as much regardless of the tax rate. Measures intended to encourage saving mainly influence the vehicle through which wealthy people save – superannuation or property or a bank account, for instance.

As well, the high discount on capital gains tax creates opportunities for artificial transactions to reduce tax and encourages investors to focus too much on speculative investment – sit back and wait for capital gains to accrue – rather than investment that earns annual income by producing goods and services.

Daley and Wood propose halving the capital gains discount to 25 per cent. This would save the budget about $3.7 billion a year.

These policy proposals may sound the same as Labor's, but there are important differences. Labor promises that, for new investments undertaken from July 1 next year, deduction of losses against wage income will be permitted only for investments in newly built homes.

Investments made before then will be unaffected, while losses on new investments in shares or existing properties may still be deducted against other investment income.

Labor promises to cut the capital gains discount to 25 per cent for all assets bought after July 1, 2017. All investments made before then will be unaffected.

Daley and Wood criticise both proposals. Retaining existing negative gearing rules for prospective investments in newly built homes adds a new distortion that would, they believe, do little to increase the supply of homes.

And they criticise Labor's plan to "grandfather" existing investments – for both negative gearing and the capital gains discount – leaving them unaffected by the change.

A better way to minimise disruption to the market and to the expectations of existing investors would be to apply the changes to everyone, but phase them in equally over 10 years.

If only making up our mind on the other election issues we'll face could be so easy.

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Is the world ruled by ideas or by interests?

Most economists believe John Maynard Keynes (rhymes with "brains" not "beans") was the greatest economist of the 20th century. But his most famous quote is one I've never been sure I agree with.

He claimed that "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.

"Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

"Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."

One man who definitely agrees is Barry Schwartz, a professor of psychology at Swarthmore College in Pennsylvania. He writes in his book Why We Work that, where once our ideas about human nature may have come from our parents, our community leaders and our religious texts, these days they come mostly from social science.

"In addition to creating things, science creates concepts, ways of understanding the world and our place in it, that have an enormous effect on how we think and act," Schwartz says.

"If we understand birth defects as acts of God, we pray. If we understand them as acts of chance, we grit our teeth and roll the dice. If we understand them as the product of prenatal neglect, we take better care of pregnant women."

Schwartz says that because ideas aren't objects, to be seen, purchased and touched, they can suffuse through the culture and have profound effects on people before they are even noticed.

And ideas, unlike things, can have profound effects on people even if those ideas are false.

I don't doubt that, in this, both Schwartz and Keynes are right. The social world is far too complex for any of us to really understand how it works. So we observe what's happening and then come up with theories - "models" - about how it works.

Those theories inevitably influence the way we think about the world, the way we react to it and the way we try to get some control over it.

But the world is so complex that we can have lots of different theories about it, or different aspects of it. Many of those theories will have an element of truth and an element of error.

We probably should have a toolbox full of theories, choosing to use the one that best fits the particular issue we're focusing on.

But human nature - our limited cognitive processing power - leads us to simplify things, settling on the one that seems to work best and apply to most circumstances. We remember it, and forget the others.

Often, of course, we don't do a lot of thinking about which theory is best, we just go along with the one most of the people around us seem to believe.

It's also true that the theories and models we rely on, consciously or unconsciously, become, as the sociologists say, "performative" - if enough people believe the world works in certain way and act on that belief, to some extent the world does start to work that way.

There are limits to this, of course. For a few decades economists allowed their dominant model - their group's way of thinking - to convince them the deregulation of the banks had brought us to the era of Great Moderation, of low inflation and unemployment with ever rising prosperity.

Their model blinded them to the global financial crisis that was coming and the years of economic malfunction that would follow.

There could be no more costly demonstration of the inadequacy of their theory about how the world worked.

So no argument: ideas have a huge effect on the world - for good or ill. But does that mean "the world is ruled by little else"?

I doubt it. The main rival for that title is the thing economists exalt above all else: self-interest. What happened to the rich and powerful, don't they have any influence on how the world is ruled?

The more I observe our politics, the more I see it as an unending battle between powerful interest groups. The political parties, contending for their own share of power, negotiate their way around the most powerful of the various interest groups.

The problem is the power democracy still gives to ordinary punters. Should I try to win votes by promising a royal commission, or should I keep in with the banks - and their generous donations to election funds - by promising to bash them with a feather?

So, do ideas really trump vested interests? Surely we're ruled by some combination of the two.

But the more I understand the weaknesses in the economists' dominant ideas about how the economy works and should work, the more I see what a bad predictor their model is, the more I wonder how such a flawed theory remains so dominant, largely impervious even to stuff-ups as monumental as the Great Recession.

Then a terrible thought strikes: maybe their ideas remain so influential in politics and the community because they happen to suit the interests of the rich and powerful.

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How behavioural economics got started

One night in 1975, Richard Thaler invited a bunch of his graduate economics student mates over for dinner. While they waited for the cooking to finish he put out a bowl of cashews.

But noticing everyone was getting stuck in, he decided he'd better take them away. His mates thanked him for doing it. It was a lightbulb moment for the young economist.

Why? Because the assumptions of the conventional economics they were studying said such a thing couldn't happen.

Each of us is assumed to have complete control over our appetites and urges. We eat no more cashews than we know is good for us.

We certainly don't need some agent of the Nanny State to limit our freedom by stepping in and taking the bowl away.

Were such a thing to happen, we wouldn't be pleased. We certainly wouldn't thank the perpetrator of this intervention.

So why did it happen? Because, contrary to the conventional model, all of us have problems stopping ourselves from doing things we know we'll regret. In one part of our lives or another, we have a problem with self-control.

And we're grateful rather than resentful when someone steps in to help us with our problem.

From then on the young Thaler – obviously a bit of a rebel and troublemaker – began compiling a list of what he came to call "anomalies" – things people actually did that the conventional model assumed they didn't.

Thaler tells the story of those cashews in his latest book, Misbehaving. It's an apt title because the book charts the development of a new school of economic thought known as "behavioural economics".

Behavioural economics studies the differences between the way people in the economy actually behave and the way the model assumes they do.

In deference to academic economists' obsession with mathematics – a preoccupation that began only after World War II, led by men such as Sir John Hicks, Kenneth Arrow and Paul Samuelson – younger behavioural economists search for ways to make more realistic the assumptions on which mathematical models of the economy are built.

Thaler says behavioural economics has three essential elements: bounded rationality (see below), bounded willpower (see above) and bounded self-interest – we can be more generous to others than the model assumes.

So what are the origins of "BE"? In their book, Animal Spirits, George Akerlof and Robert Shiller argue that John Maynard Keynes was the first behavioural economist.

Thaler says Keynes was "a true forerunner of behavioural finance". (Behavioural finance is the part of behavioural economics that focuses on behaviour in financial markets.)

Keynes argued that individuals' "animal spirits" – his word for their emotional responses – played an important role in their decision making. At times this could discourage business from investing, thus strengthening the case for governments to use their budgets to stimulate the economy.

Keynes wrote his magnum opus in 1936. But Thaler takes BE's origins back to the founder of economics, Adam Smith, and the less famous of his two books, The Theory of Moral Sentiments, published in 1759.

Smith was "an early pioneer of behavioural economics" because of his detailed description of problems of self-control.

A more obvious forerunner is the American academic Herb Simon who, in 1957, coined the term "bounded rationality" and was later awarded the Nobel prize in economics for his trouble.

Bounded rationality is the idea that people's ability to make "rational" – coolly calculating – decisions is limited by the information available to them, the trickiness of the decision, the brain's inadequate processing power and the time available for thinking about it.

Many people probably assume, however, that the true originator of BE is the Princeton psychologist Daniel Kahneman who, with his late partner, Amos Tversky, began in the early 1970s identifying the many "heuristics" (mental shortcuts) and biases that cause humans' decision making to be less than rational.

Behavioural economics has long been about incorporating the insights of psychology into economics. So it was no great surprise when the psychologist Kahneman was given the economics Nobel in 2002.

Thaler moved to California in 1977 to work with Kahneman and Tversky for a year, but that was because he'd already done a lot of thinking about "anomalies". His book leaves me in little doubt that he's the economist who should get most credit for establishing BE as a respectable subject for economists to study.

Thaler began writing a column about "anomalies" from the first issue of the American Economic Association's new Journal of Economic Perspectives in 1987.

In 1991 he teamed up with Shiller (who in 2013 got the Nobel for his work in behavioural finance) to organise a semi-annual workshop on behavioural finance under the auspices of the National Bureau of Economic Research.

One breakthrough in BE came when it was demonstrated that people's mental biases were systematic – that we were, in the title of Dan Ariely's book, Predictably Irrational.

If non-rational behaviour is predictable, it can and should be incorporated into economists' models.

And if people make predictable mistakes when buying shares and so forth, there ought to be scope for other investors to make a buck by betting against them.

Little wonder behavioural finance quickly gained a following in financial circles.

In economics, however, it's said that new ideas gain ascendancy "one funeral at a time". Oldies have a vested interest in preserving the received wisdom, but young academics are attracted to new and interesting ideas that seem to better explain the world.

Thaler's best-selling book with Cass Sunstein, Nudge, showing how governments can nudge people towards making more sensible decisions, led to the setting up of Britain's Behavioural Insights Team and copycat outfits in many countries, including Oz.

These days, BE is offered in most undergraduate university courses. So behavioural economics is now firmly rooted and can only grow in its influence on economists' thinking.

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Herald's move to explanatory journalism is its future

How has the Herald changed in 185 years? How should I know – I've been working for it for less than a quarter of that time. But I dare to claim that, of all the change since 1831, most of it has occurred since I started in 1974.

A few years back, at a staff function to celebrate those of us who'd hung around longer than could reasonably be expected, someone had the idea of presenting us not with a pen or a watch – I'd already had one of each – but with a framed copy of the front page of the paper on the day we started.

Sorry, but it was an uninspiring present that showed how far we've had to travel. It was grey in every sense. That was long before the Herald moved to colour printing, but not before our subeditors had abandoned their sacred duty to drain the colour out of every story before allowing it to be seen by the public.

The Herald stuck to "objective" reporting of the facts – "just the facts, ma'am" – and anything that remotely resembled an opinion – it was a beautiful sunny day, the prime minister seemed distracted, the accident was horrific – was verboten.

It was years before journalists attended university journalism courses, to be reminded that at its core the journalistic task involves subjective judgments: which events get reported and which don't; which facts get used and which don't; which stories get run and which "hit the spike"; which are reported at length and which in brief; which lead the front page and which go up the back somewhere.

It was because journalism was mere description of facts that readers didn't need to know the journalist's byline. They needed to be told only that a story had been written "by a Staff Correspondent" – that is, he (and occasionally she) had been trained by the Herald, and so could be trusted to get everything right.

Nothing of any great interest had happened the day before my first day on the job. The front page was nonetheless terribly busy, as editors crammed in as many stories as they could fit. To modern eyes the page was messy and uninviting.

That was only a few years before the Herald abandoned the unachievable struggle to be a "paper of record". Much better to focus on a smaller number of more interesting or important events – preferably ones other media didn't have – and do justice to them, illustrating them and laying them out on the page in a visually attractive way.

One thing that issue of the paper did have going for it, however: its price was 8 cents. Of course, in those days it didn't have lift-out sections on TV programs, food and restaurants, travel, health and fitness, and gig guides.

Apart from Column 8, still signed by Granny, there were few opinion columns in the paper of the mid-1970s. Comments or analysis sitting beside news reports were rare to non-existent. There were a few bylined feature articles, but for the most part opinion was restricted to unsigned editorials – or "leaders" – written on behalf of the editor.

It was only a little over two years before I was moved from economic reporting to opinion writing. At first my job was to write a leader a day, but by 1980 I was writing three columns a week. I'm still writing those columns, on the same days and the same parts of the paper.

Having checked with the Herald's historian, Gavin Souter, I think I'm safe in claiming to be the longest-serving columnist in the paper's 185 years.

This may tell you something about me, but mainly it says something about how the paper and the world in which it exists have changed. In relatively recent years the Herald – on paper and online –has become chock full of all manner of columns, comments and analyses.

Why? Partly because our marketplace has become ever more competitive. Journalists tend to focus hardest on competition from rival newspapers, but more intense competition has come from the electronic media, radio and television.

This competition started from the moment in the 1930s that radio networks began reporting their own news stories rather than reading out stories from the papers. Eventually radio began delivering news bulletins on the hour, but not before television channels made their nightly news bulletins the chief means by which Australians caught up with the news.

With so many of our readers already having heard the bare bones of so many of our news stories, is it any wonder newspapers had to change their news offering? We tried harder to find our own exclusive stories, provided greater detail and more background information, asked "the next question" – what happens now? how will the authorities react? – as well as adding more commentary and analysis, including the pure opinions of columnists and in-house experts.

For much of the past 185 years there were two things you could do after you got home from work, had dinner and wanted to relax: sing songs round the piano or read the paper. Then came radio and its serials and then the all engrossing idiot box.

On a wider level, therefore, newspapers have long faced greater competition from an ever-expanding array of ways to spend your leisure time. More reason to change our product.

The advent of the internet has added greatly to that array, as well as multiplying rival digital sources of news – not just from other cities and states, but from English-speaking news providers around the world.

By contrast, it's allowed the Herald and other papers to use their websites to get back into "breaking news" – news within minutes of it happening – for the first time since the 1930s.

These days, however, digital sources of breaking news are so plentiful and so freely available –literally – as to greatly diminish the commercial value of ordinary news. How are we to pay the wages of our journalists?

Online advertising is far cheaper than it is in newspapers and free-to-air television. What's more, online advertising is dominated by Google and Facebook, not the traditional news sources.

We need something more than ordinary news, some way of adding value to a product we can ask readers to pay for, preferably by subscription.

The material standard of living of people in the developed economies has risen many times since the Industrial Revolution. This remarkable achievement has been the result of two main factors: technological advance and ever-growing specialisation within occupations.

The inescapable consequence, however, has been to make the workings of our economy and many other aspects of our lives infinitely more complex than they were. There was a time when car owners did much of their own routine maintenance; today, many hardly dare lift the bonnet.

When I joined the Herald it still subscribed to the notion of the "universal journalist" – any Herald-trained journalist was capable of accurately reporting any story on any subject. I doubt if this was true then; it's become less true with every passing year.

Since I became economics editor in 1978, I've worked to ensure that all economic reporting is done by journalists with economic qualifications. Ideally, legal reporters have law degrees, science reporters have science degrees and so forth.

With the growing complexity of daily life has gone an ever-rising level of educational attainment in the workforce. The Herald has always had a better-paid and better-educated readership, but it's never been better educated than it is today.

This means a readership far keener to know how and why, not just who, what, where and when.

But not all "advances" have been for the better. Governments have become bigger, ministers' staffs have become bigger, politicians are far more adept at marketing, more focused on perceptions and appearances, and unceasing in their attempts to "manage" the media.

At the same time, the lobbying of government by business and myriad interest groups has proliferated. A small industry of "economic consultants" has grown up in Canberra just to produce modelling that purports to prove the rightness of lobbyists' claims.

If keeping governments and power-holders honest is one of the primary responsibilities of the quality press, never have its services been more sorely needed.

A more complex world requires more explanatory journalism from more specialised and qualified journalists. The blizzard of information assailing us requires more trusted guides to what's worth worrying about and what isn't.

A world of more active lobbying by powerful interest groups and more manipulative and secretive governments requires more investigative journalism, not just by dedicated investigation teams but also by more specialised journalists who do more than meekly report the claims of politicians and lobbyists.

This is what I've tried to contribute with my "comment and analysis" in my time at the Herald. It's needed far more today than when I started. I confidently predict the need will only grow.

It's why I hope to see the Herald meet the challenge of digital disruption, making whatever adaptations are needed to ensure it continues to serve readers and contribute to the nation's good governance.

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Why the banks' activities should be constrained

Is there any justification for a royal commission into the conduct of the banks? Is it just a political stunt? All royal commissions are called for political reasons and many are stunts, in the sense that their primary objective is just to bring particular issues into the public spotlight.

To me, the best justification for an inquiry into the banks is that they still don't seem to have got the message. They've been caught treating their customers badly, but so far they've shown little sign of contrition - sorry about the few bad apples, but I didn't know - and little willingness to make amends.

For years they've been locked in a race to maximise profits. They've put profits and executive bonuses ahead of the interests of their customers, and seem keen to resume profit maximising as soon as the fuss declines.

We need to keep the fuss going until the bank bosses realise how unacceptable we find their behaviour. Only then may they accept the need to stop incentivising​ their staff to exploit their customers' vulnerabilities, even at the cost of a little profit.

But if you think we have trouble with our banks, you should get out more. So far, at least, we've been let off lightly. I've just been reading the latest book about the banks' central role in causing the global financial crisis of 2008 and the Great Recession it precipitated.

Almost eight years later, the recovery has been anaemic and looks like staying that way for years yet. If China's slowdown becomes a "hard landing", it's likely to be because the financial crisis has finally caught up with it, too.

The book is Between Debt and the Devil, by Lord Adair Turner, who took over as chairman of Britain's Financial Services Authority just as the crisis struck.

Among the many reservations that may be expressed about the "financialisation" of the developed economies - the huge expansion in the share of the economy accounted for by the banks and other providers of financial services over the past 30 years - Turner is particularly critical of all the credit creation - lending - the banks have done.

For decades before the crisis, in every developed economy, bank lending grew at two or three times the rate at which the economy grew.

Central bankers and other economists came to believe this was normal and natural; how you achieved a growing economy.

In reality, it just meant that when the mountain of credit finally collapsed, plunging the world into its worst recession since the 1930s, many households and businesses were left deep in debt.

According to Turner, it's this "debt overhang" that's doing most to stop the major economies returning to healthy growth. As part of the initial response to the crisis, governments shifted much of the banks' own debt onto the government's books.

This did nothing to diminish the overall amount of debt, just made governments reluctant to increase their spending to support the economy.

But it's the continuing debts of businesses and households that do most to explain the continuing sluggishness of the major economies. When your debt far exceeds the value of your assets, you cut your spending to the bone so as to use as much of your income as possible to pay down that debt.

Trouble is, when so many others are doing the same, their spending cuts cause your income to fall, leaving you with little to use to repay debt. The economy can't really recover and, collectively, it makes little progress in "deleveraging" - getting its debt below the value of its assets.

This is the bind the North Atlantic economies find themselves in.

Turner says the huge growth in bank-created credit has been particularly pernicious because the banks much prefer to lend for purchases of real estate. They do little lending to big businesses investing in expansion, and much of their lending to small business is secured against the owner's home or other property.

Trouble is, with the banks infinitely willing to lend for housing, but with the supply of land in desirable locations strictly limited, the inevitable result is to bid up house prices.

This explains why - though local economists staunchly reject the thought - when foreign economists look at our stratospheric house prices and record rate of household debt, almost to a person they see an asset-price bubble that must one day burst.

Turner devotes much of his book to proposing radical ways the major economies can extract themselves from their unshakable debt overhang and return to healthy growth, and to proposing ways governments can curb their banks' unending credit creation so as to ensure it's a long time before their excessive lending for real estate brings on the next global financial crisis.

But ever-increasing lending is the main way the banks make their ever-increasing profits. They would put up an enormous fight to stop governments clipping their wings in this way.

Which brings us back to the royal commission. Do we want to be governed by politicians deferring to their generous backers in banking, or do we want to send politicians and bankers alike a message that the interests of customers and the wider economy must come first?

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The economy rests on Christian foundations

I can't think why, but Easter always reminds me of Christianity. Not, of course, that Christianity has anything to do with the grubby, materialist world of economics. Or does it?

Australia is the most unbelieving it has ever been, with the most recent census saying that only 61 per cent people identify themselves as even nominally Christian.

Twenty-two per cent say they have no religion and another 9 per cent didn't bother answering the question. People of non-Christian religions account for 7 per cent of the population.

Separate figures say only about 8 per cent of Australians attend religious services regularly. This is about the same as in Britain and France, but a lot less than in Canada or the United States.

With so few people having had much contact with organised religion, it's not surprising that so many people imagine Christianity to have little bearing on the modern world and economy.


But that is far from the truth, as Australian author Roy Williams argues in his latest book, Post-God Nation? I'm quoting him liberally.

Williams says he's sick of being told that religion's influence on our country has been either minimal or malign.

"It is a fact of history that Australia would not exist in anything like the form it does but for Judaeo-Christianity," he says.

"Deep-seated legacies of our religious heritage still endure, and will continue to do so for the foreseeable future."

Sydney Anglican Peter Jensen says "we are . . . secular, in a Christian sort of way".

This might be a new thought for many younger people, but it's not a rare observation. Former British prime minister Margaret Thatcher said "the Christian religion . . . is a fundamental part of our national heritage. For centuries it has been our very life blood."

Historian Geoffrey Blainey has said that the Christian churches did "more than any other institution, public or private, to civilise Australians".

All market economies rest on a foundation of laws, which enforce private property rights, the honouring of contracts and much else. Williams writes that all Western legal systems are grounded in two core assumptions, both from the Bible: that humans have free will and that morality is God-given.

But the English legal system has many other religiously based features, such as the separation of church and state, the jury system, Magna Carta (negotiated by the Archbishop of Canterbury) and the Bill of Rights (asserting Parliament's supremacy over the king, since both were "bound by the laws of God and nature").

The system of common law, based on rulings by judges rather than parliaments, was established by the devout Henry II, who ensured that most of the early judges were clerics, because of their knowledge of canon law.

Economic growth comes mainly from productivity improvement, productivity improvement comes mainly from invention and innovation, and invention mainly involves applying scientific discoveries.
Guess who were the West's first promoters of science and the inventors of universities?

The scientific method – discovery by empirical reasoning – is, Williams writes, unquestionably a byproduct of Christianity. To know the truth of God's creation, it's not enough to rely on human logic. It's also necessary to observe closely what God has created.

Most people today don't realise how many of the leading politicians, judges and business people who shaped the social and economic system we have inherited had religious beliefs or backgrounds.

Most of the founders of the trade union movement and the Labor Party, for example. John Fairfax, who bought The Sydney Morning Herald in 1841, was a deacon of the Pitt Street Congregational Church, who attended up to four services on a Sunday.

Four of the Herald's first five editors were ministers of religion. In his research, Williams found it remarkable how often famous Australians turned out to have been the son of a clergyman (me, too).

But Christianity has permeated our attitudes and values, not just the institutions of our society.
You can be an atheist or a humanist, but if you have any ethical beliefs or moral values they might be influenced by Buddhist ideas, but they're far more likely to reflect Judaeo-Christian thinking.

And though economists keep forgetting it, it's the ethical behaviour of ordinary business people and consumers that keeps our economy ticking over satisfactorily and makes the CommInsures still the exception rather than the rule.

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How signalling helps make the economy work

Why do so many people go on to university after finishing school? Why do some uni graduates get a job, but then go back to uni for further qualifications?

Why do sensible people dress up for a job interview – or wear a suit and tie if they're in court charged with an offence?

For that matter, why do people engage in conspicuous consumption – buy flash clothes or cars or houses, or send their kids to flash private schools?

Why do so many businesses put so much money and effort into protecting and projecting their brands?

Short answer to all those questions: because they're trying to signal something. What? Usually, their superior quality – although in the case of conspicuous consumption they're signalling their superior social status.

Signalling is something you don't read about in economics 101 textbooks, even though it occurs in all real-world markets.

That's because the simple neo-classical model makes the unrealistic assumption of "perfect knowledge" – buyers and sellers know all they need to know about all goods and services – not just the range of prices on offer but also the characteristics of the goods offered by various sellers, including their quality.

For many years, progress in economic theory has involved relaxing the various assumptions of "perfect competition" to see what we can learn from more realistic assumptions – which, by the very nature of theory and models, will still be a fairly simplified version of reality. (If a model was as complex as the real world, it would tell us nothing about what causes what in that world.)

Since the early 1970s, economic theorists have been studying "imperfect knowledge" (which in econospeak means "far from perfect", not "almost perfect"), recognising that there's much relevant information people don't know and that information is often costly to collect (in money or time).

As well, information is often "asymmetric", in that the people selling something, usually being professionals, know a lot more about it than buyers, usually amateurs, do.

In 2001 three American academic economists – Michael Spence, George Akerlof and Joseph Stiglitz – shared the Nobel prize in economics for their seminal contributions to the relatively new field of "information economics".

Akerlof (who's married to a certain central bank chairwoman) got his gong for a paper he wrote in 1970 called The Market for Lemons, aka used cars. Spence got the gong for a paper he wrote in 1973 about signalling in the job market.

So let's start again: why do people delay their income earning to get educational qualifications?

If you say it's because they want to gain knowledge and expertise in some field to make their labour more valuable – to increase their "human capital" – and help them get a better-paid job, you're not wrong and Spence wouldn't disagree with you.

But he focuses on a different, less obvious motivation. Employers are looking for intelligent workers and are willing to pay more for their services. But when you're hiring workers, it's hard to know how smart they really are. As economists say, it's an "unobservable characteristic".

So how do workers who know they're smart demonstrate that to potential employers? By using their educational qualifications to signal the fact. Employers are impressed by qualifications because they know they're not easy to obtain – they're costly, in a sense.

Of course, people who aren't so smart can gain qualifications if they try hard enough. But genuinely smart people don't have to try as hard, so they can gain higher, better qualifications than the less-smart can, and employers know this.

You're in line for a Nobel prize when you open up a new field and then other, more junior academics come along behind you to elaborate and expand on your discovery, eventually making it look pretty primitive.

By now thousands of academic papers have been written about signalling in various markets. It's become part of the study of "industrial organisation" (industry economics, as we used to say) but is also a branch of game theory.

Theorists have looked at cases of people sending signals implying they possess qualities that they don't and cases where signals are distorted by "noise" (say, you struck it lucky in the exams). And whereas in simple theory markets only ever have one equilibrium point – where everything is in balance – with signalling there are multiple equilibria.

One signalling theorist is Dr Sander Heinsalu, a bright young Estonian now in the Research School of Economics at the Australian National University.

In a recent paper he develops a "repeated noisy signalling model", quoting examples such as a politician giving speeches intended to make him appear competent, a firm buying positive product reviews, and a male deer growing antlers every mating season.

He finds that, if the cost and the benefit of signalling are constant across periods, the degree of signalling effort falls over time. This fits with the way conspicuous consumption falls with age.

In another paper Heinsalu says the conclusion of most signalling papers is that people for whom gaining more of the valued characteristic would be costly don't exert as much signalling effort as those for whom it is less costly.

But in his own paper he demonstrates that in some circumstances it can be the other way round.

With corruption, politicians face minor temptations and big ones. A pollie who is "too clean" may be avoiding minor misdeeds so he can survive long enough to engage in major graft when the opportunity arises, whereas another planning to avoid graft may not worry about small misdemeanours.

The guilty may deny accusations more strenuously than the innocent do because the innocent know they'll have less trouble proving it later.

As Shakespeare said, "the lady doth protest too much, methinks".

But if you want more proof than a quote from the bard, read the paper on his website. Hope your maths is up to it.

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Business - and customers - pay for bad business behaviour

It's remarkable the way the Business Council of Australia constantly lectures us on the "reform" we should be accepting to improve our economic performance (and, purely by chance, their profits), but never seems to lecture its big-business members on their manifest need to "reform" their own standards of behaviour.

Among its most profitable members would have to be the four big banks. But the litany of scandals over their bad treatment of customers never seems to end.

The latest was CommInsure's denial of legitimate life insurance claims, but there's also been ANZ's alleged manipulation of a key commercial interest rate and the Commonwealth Bank's bad financial planning advice that lost money for many customers.

Now the chairman of the Australian Securities and Investments Commission, Greg Medcraft, has joined Australian Prudential Regulation Authority boss Wayne Byers in demanding the finance industry fix its corporate culture.

"Time and again, we have seen firms blaming [behaviour] on a few bad apples driving bad outcomes for consumers, rather than taking responsibility by looking more closely at their organisation and implementing the necessary changes to address the cause of the problem," Medcraft said on Monday.

"At the end of the day, you need to have a culture that your customers can believe in."

The captains of finance have not reacted well to the bureaucrats' admonition. David Gonski complained about the corporate regulator being the "culture police", while someone from the Institute of Company Directors offered the uncomprehending advice that corporate culture could not be imposed by law.

It would be wrong to focus only on the bad behaviour of the banks, of course. There have been other instances from other industries. Take 7-Eleven's underpaying of foreign workers.

Or take the many notorious cases of businesses rorting government subsidy schemes in ceiling insulation, childcare and vocational education and training.

It's possible what we're seeing is merely greater exposure of the bad behaviour of big business thanks to a surge in business investigative journalism, with Fairfax Media's Adele Ferguson at its head.

But I've been in and around businesses since I left school 50 years ago, and I think bad corporate behaviour is definitely worse than it was. As executive remuneration has headed for the stratosphere, so the willingness to exploit customers and staff has grown.

But why? One reason is the rise of a more fundamentalist approach to economics. "Economic rationalism" has prompted much deregulation, privatisation and outsourcing, which has made competition a lot more intense in many industries.

That's not necessarily a bad thing, but as managers have experienced greater pressure to perform – as it's become harder to keep profits high and rising – they've passed the pressure on to staff and customers.

Economic fundamentalism is both a product of the greater materialism of our age and a cause of it, with all its emphasis on monetary values and view of "labour" as just another resource to be exploited along with other raw materials.

What's worse is that economic fundamentalism has had the effect of sanctifying selfishness. When I put my own interests ahead of other people's, I'm not being greedy or self-centred or antisocial; I'm just being "rational".

One effect of the greater pressure to perform is the present "metrics" fad – the obsession with measuring aspects of the firm's performance, then using those measures to improve performance, such as by setting targets based on "key performance indicators".

What the KPI obsession is saying is: just get results; how you get them is of lesser interest. I'd lay money that the reason people at CommInsure were knocking back legitimate claims was they were being encouraged to do so by KPIs or other "performance incentives". (That's why it's dishonest for people at the top to blame "a few bad apples".)

Most people's sense of what is acceptable, ethical behaviour is determined by what they believe their peers are doing. If they do it, it's ethical for me to do it; if they don't do it, maybe I should feel guilty about it.

The trouble is, studies show that adults, like children, often harbour exaggerated impressions of how many others are doing it.

Social conformity (aka "culture") is such a powerful influence that it's always been hard for people to follow their own "moral compass". With the decline of religious adherence, it's harder even to have one.

The Business Council and its members ought to be a lot more worried about the decline in their standards of behaviour than they seem to be.

One fundamental the economic fundamentalists keep forgetting is that market economies run best on widespread trust: mutual trust between management and staff, and between businesses and their customers.

Allow declining standards of behaviour to erode trust and the economy suffers. Customers become harder to persuade, argue more with counter staff, are surlier with call-centre staff and more inclined to take their business elsewhere. They resist "upselling".

With less trust you have to waste a lot of money on increased security in its many forms. And governments react by multiplying laws and legal requirements.

When so many companies demonstrate their contempt for other taxpayers by the way they manipulate the tax they pay – their ethic is that if it's (barely) legal, it's ethical – it becomes much harder for governments to get voter support for cutting the rates of those taxes.

Who knew?

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Let's 'reform' lack of satisfaction at work

Has it ever occurred to you that, in all our economic striving, most of us – almost all our business people, economists and politicians, but also many normal people – are missing the point?

It occurred to me years ago, and I've thought about it often, but reading a little book by one of my gurus, Barry Schwartz, a professor of psychology at Swarthmore​ College in the US, has revved me up.

In my job I have to focus mainly on whatever issues everybody else is getting excited about. I've written a lot lately about the budget deficit, mainly because I see the Coalition swinging from exaggerating the size and urgency of the problem while in opposition, to virtually ignoring it now it's in government.

They had one big ill-considered and ill-fated attempt to fix the problem in their first budget, but now they don't even want to think about it.

Of course, getting the budget back to surplus is really just a housekeeping measure. It doesn't advance our cause in any positive sense, it just stops problems building up for the future.

No, the more positive efforts to improve our lot have focused on the need for "reform". The economists have noticed that the rate of productivity improvement has slowed and, since improving our productivity is the main way we keep our material standard of living rising, they're casting around for something we could do to improve matters.

When economic-types look for things to improve, their first thought is to "reform" taxation in a way that does more to encourage people to "work, save and invest".

Sorry, but all this is missing the point. Schwartz's little book is called Why We Work, and he asks us to reconsider the most basic question in economic life: why do we work?

To most people that's a stupid question. We work to make money, which we then use to keep body and soul together and buy the other things we need to give us a happy or satisfying life.

Next question: do we enjoy our work? Answer: sometimes yes, sometimes no. Some people do most of the time; most people don't.

The basic economic model assumes that people don't enjoy work; they do it only for the money. And, except perhaps to the individual, whether they do or they don't isn't of great consequence.

Most employers organise work in ways designed to maximise their employees' productivity – their productiveness. If their workers happen to enjoy their jobs, that's their good luck. If they don't, that's not something a boss needs to worry about.

Schwartz's argument is that we've allowed money – and the economists' way of thinking about work, which goes back to Adam Smith in 1776 – to get us muddled between means and ends.

Money is merely a means, not an end in itself. The end money is meant to be a means to is life satisfaction. But if satisfaction is the object of the exercise, why on earth would we organise the economy on the basis that whether or not people get satisfaction from their jobs doesn't matter?

Why fixate on earning money to buy satisfaction when we could be doing much more to gain satisfaction while we earn?

When you remember how much of our lives we spend working, think what a fabulous "reform" it would be if more of us got more satisfaction from our work.

If we got more satisfaction from our work, economists and politicians wouldn't have to worry quite so much about ensuring our money income kept growing strongly so we could keep attempting to buy more satisfaction. (Tip: the satisfaction you get from enjoying your job and doing it well is more powerful than the satisfaction you get from buying more stuff.)

And if bosses got more satisfaction from their own jobs, maybe they wouldn't be so obsessed by achieving ever faster-growing profits so as to justify ever-bigger bonuses.

You'd think that, with all the status and executive assistants to wait on them and people to boss about, bosses would be rolling in job satisfaction.

But when I see how obsessed they are with pay rises and bonuses, it makes me wonder if they actually hate their jobs more than most of their employees do.

Of all the company's workers, they're the ones showing most sign of only doing it for the money.

By now, I know, many managers will be thinking, if I made making sure my workers had a good time at work an objective, their productivity would suffer.

That's certainly why many jobs have been designed in the soul-destroying way they have been, and the mentality that informs the way many managers manage. Treat 'em mean to keep 'em keen.

But consider the reverse possibility. There's growing evidence that workers who gain satisfaction from their jobs try harder and think more about how they could do their jobs better. Is that so hard to believe?

I'm convinced greater effort to make jobs more satisfying could leave most of us better off with, at worst, no loss of efficiency.

How do employers go about making jobs more satisfying? How can someone with a deadly job make it more emotionally rewarding?

These questions have been well studied by industrial psychologists and Schwartz has lots of useful things to say. But I'll leave that for another day.

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How to get better, not smaller, government

Whether it's a week early or not, it looks a safe bet that this year's budget will do little more than keep the wheels of government turning for another 12 months. If so, it will confirm our worst fears that neither side of politics is capable of improving things.

I hope I'm wrong, but it now seems that the sweeping tax reform we were long promised by the Coalition – with everything on the table, and a white paper to follow a green paper - has shrivelled to some minor tinkering to pay for a minor tax cut.

Which brings us back to the budget's primary macro-economic purpose, achieving "fiscal sustainability". We've been assured – as usual, by leak – that any improvement in revenue estimates arising from the seeming recovery in iron ore prices will be allowed to reduce the budget deficit, not used to fatten the tax cuts or otherwise buy votes.

Considering all the crocodile tears the Coalition shed over "debit and deficit", it's the least Malcolm Turnbull could do.

The Coalition has done little to restrain government spending in its first term for two reasons, one political and one economic. The political reason is that the public and the Senate held Tony Abbott to his last-minute and utterly unneeded promise not to cut any of the key areas of government spending.

The economic reason – which was perfectly sensible and actually began under Labor – was that with the economy growing at well below its "trend" (average) rate, now was the wrong time to weaken it further by raising taxes or cutting government spending.

With forward-looking trend growth now reduced to 2.75 per cent a year and the economy growing by 3 per cent in 2015, we should be getting on with budget repair.

So both those restraints are now inoperative – or should be. It's one thing to avoid nasties in a pre-election budget; it's quite another to lock yourself in for another term with promises not to cut this or that spending, or not to adjust taxes.

Similarly, it's all very well for Turnbull's supporters to say he needs his own mandate to establish his legitimacy and authority with his fractious backbench; it's quite another for him to gain a "mandate" that doesn't include a licence from the electorate to make the improvements we need.

So a key issue will be how much reform Turnbull promises not to make and how much leeway he leaves himself to do what needs to be done.

But after the monumental setback of Abbott's first budget, I worry not just about the character strength of our politicians, but also about the quality of the advice they're getting from the econocrats of Treasury and Finance and the heads of other departments.

One thing the bureaucrats should understand is that the ideological push for lower government spending is a snare and a delusion. It's never gonna happen, because the public won't accept it and there are no pollies mad enough to try.

The key to good spending management is to accept that the goal should be not smaller government, but better government. Delude yourself that we'll soon be seeing smaller government – that there are vast areas of things governments will stop doing – and you're more susceptible to the kind of short-sighted, mindless cutbacks that often involve false economies, mere cost-shifting or savings that don't stick, of which we saw so much in the first Abbott budget.

But accept that we need better government – that government will always be with us, with ever-growing responsibilities and spending – and you see more clearly that the task is to identify and correct specific instances of excessive or ineffective spending – with which the budget no doubt abounds.

You slow the rate of spending growth, reducing the incidence of what the public thinks of as "waste" (it may look like waste to me, but not to whoever's income it's adding to), thus giving taxpayers better value for money and helping to reduce the resistance to paying tax.

Focus on better government and you realise that the "no-brainer", set-and-forget, don't confuse me with the details, approach favoured by econocrats has an appalling record of failure.

You don't bother to think hard about the peculiar characteristics of the service being performed, nor do you wonder about the wisdom of letting private firms "sell" heavily subsidised government services, you just resort to generic, magic answers such as imposing an "efficiency dividend", "getting the incentives right" and making the provision of public services "contestable".

Economic shibboleths are no substitute for detailed knowledge and careful analysis.

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China still our advantage in a dismal world

We are living in an era of exceptionally weak growth in the world economy. We can now look back and see that era began after the global financial crisis in 2008. We can look forward and not see when the era will end. It could be years, for all we know.

Naturally, this continuing global weakness has its effect on us. So we shouldn't blame ourselves for our own weaker growth relative to our earlier performance. Rather, we should recognise that, relative to the other developed economies, we've been doing pretty well.

But we do need to remember that, compared with the others, we have a secret weapon: our strong economic links with China.

Nigel Ray, a deputy secretary of Treasury, spelt out the unusual features of the world we've entered in a speech this week. He notes that "global growth has struggled to regain sustained momentum post-global financial crisis, and global aggregate demand remains weak".

This is despite monetary policy (interest rate) settings in nearly all the major economies remaining "extraordinarily accommodative", and global public debt increasing since the crisis.

Official forecasters have continued to downgrade prospects for global growth, he says. The International Monetary Fund downgraded its forecast in its January update - the 17th downgrade in five years.

Now get this. Slower world growth has been accompanied by a number of trends that can be seen across the global economy: slower growth in international trade, weak business investment, slower productivity growth, slower population growth in the advanced economies, low inflation, and lower expectations about future inflation.

Wow. That's the sort of poor performance you expect to see briefly at the bottom of a world recession, not as a semi-permanent state.

We knew that slower growth in the working-age population as a result of population ageing would mean slower economic growth, but now official forecasters in other countries are also reconsidering their view of long-run "potential" growth in gross domestic product (just as we've done recently, cutting it from 3 per cent to 2.75 per cent).

For the other countries, "this partly reflects the ongoing legacy of the global financial crisis - such crises have long-lived effects on investment in productive capital and on labour markets, increasing structural unemployment and lowering labour force participation rates".

In other words, if business goes for some years under-investing in new and improved capital equipment, this diminishes the economy's production capacity. And when some workers go for years unable to find another job, they tend to lose their skills and the self-discipline that goes with having to turn up to work on time every day and do as you're told.

But it's not only the after effects of a protracted recession. Ray says recent estimates by IMF economists suggest that productivity growth was slowing in the advanced economies even before the GFC.

More recently, we've noticed that the "convergence" between the emerging and the advanced economies (as the emerging economies catch up by growing at a much faster rate than the advanced countries) that we've seen since the turn of the century is showing signs of stalling.

If that happens, it means slower global economic growth and could have other undesirable consequences.

It happened that Reserve Bank deputy governor Dr Philip Lowe gave a speech in Adelaide on the same day, adding to Ray's description of the strange state the world economy finds itself in.

Lowe noted that, although the official interest rate in the United States has been increased for the first time in nine years, the Bank of Japan has unexpectedly moved its rate into negative territory.

In doing so it joined the European Central Bank, the Swiss National Bank, the Swedish Riksbank and the Danish central bank with negative interest rates. And there's an expectation in various countries that yet further monetary easing will take place.

Lowe says that, in earlier decades, it was very rare for central banks to worry that inflation and inflation expectations were too low.

"Yet today we hear this concern quite often, and the 'unconventional' has almost become the conventional," he says.

But back to China and the special advantage it gives us in a dismal world. Ray says we have a higher proportion of our exports - about 32 per cent of our exports of goods - going to China than any other advanced economy does.

Twenty years ago, China's economy was less than a third of the size of America's. Today it's the largest economy in the world when you measure it according to "purchasing power parity" (as you should).

China's rate of growth may be slowing, but it remains one of the fastest growing economies in the world.

What many foreign observers don't seem to understand is that, just as we are "rebalancing" our economy from mining-driven to other sources of growth, so the Chinese are doing something similar, shifting from growth based on heavy industry, investment and exports, to growth based on service industries, consumer spending and imports.

It's possible the Chinese economy could falter as it makes this transition, but they'll get there in the end and this is why it's possible for us to shift from selling them mainly minerals to selling them the goods (fancy Western foodstuffs) and, particularly, the services their growing middle class demands.

We've been talking about this for years, but now it's actually happening. Ray says China is already our largest destination for services exports, taking about 14 per cent of them last financial year.

China is now our second largest source of overseas visitors, and their visitors spend far more than average. More than a million Chinese tourists arrived in 2015.

But get this: those million visits represented only about 1 per cent of China's overseas tourism market. They are so big relative to us that just a tiny share of their market is a big deal in helping us keep growing.

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Where the jobs will come from

It's a question doubting customers have been asking me through the whole of my career: but where will all the jobs come from? We worry about jobs, convinced there's never enough of them.

Whenever we're in a recession, with unemployment high and rising, people simply can't see how we'll ever get it down again.

In the more recent resources boom, a lot of people got jobs in faraway places helping to build new mines and natural gas facilities, but we knew that wouldn't last.

Mining now accounts for about 10 per cent of the value of the nation's production – gross domestic product – but it still employs only about 2 per cent of the workforce.

When the three foreign car makers announced in 2013 that they'd be ending Australian production later this year or next, the familiar cry went up: where will the new jobs come from?

It was a question I used to find hard to answer, but now I don't. When I started in this job more than 40 years' ago, there were 5.8 million people in the workforce. By now it's more than doubled to 11.9 million.

So the jobs did come, despite 40 years of worrying that they wouldn't. Where did they come from? I could work out from the figures how many came in which particular industries, but I'll skip to the bottom line: virtually all the extra 6 million jobs came from the services sector.

Where will the jobs be coming from in the years ahead? Same place. Indeed, they already are.

Our most recent worry has been where our economic growth would come from now coal and iron ore prices are falling and no new mining construction projects are taking the place of completing projects.

But the evidence is coming in. We're experiencing strong expansion in parts of the vast services sector, which is generating lots of extra jobs.

Whereas mining – and farming and, these days, even manufacturing – are capital-intensive, and so provide few jobs, service industries are labour-intensive, and so provide lots of 'em.

From a job-creating perspective, the trouble with physical things – "goods" – is that it's been relatively easy to use machines to replace workers, whereas you still need a lot of people to provide services, even when those people are given better machines to help them.

The other trouble with goods industries is that there's a limit to how many things – clothes, cars, fridges, laptops – you want to own. Time has shown there's almost no limit to the number and kinds of services we'd like others to perform for us.

Did you know there's such an occupation as "lactation consultant"? There used not to be, but there is now.

These are the reasons why almost all the extra jobs being created are in the services sector.

Last year, total employment grew by a very healthy 300,000 jobs, more than half of them full-time.
Research by Professor Jeff Borland, of the University of Melbourne, has found that more than 90 per cent of these jobs occurred in the private sector.

This private sector growth was concentrated in NSW and Victoria, whereas the growth in public sector employment was concentrated in Queensland and South Australia.

But where did the additional jobs come from? Fully a third – 100,000 – were in (the mainly private sector parts of) healthcare. Then came 75,000 in businesses providing professional and technical services, almost 50,000 in retailing, more than 40,000 in financial services and more than 30,000 in administrative and support services.

The thing to note about that list is that while some of those jobs would have been low-skilled, many – particularly those in professional services and healthcare – would have been high-skilled, well-paid and intellectually satisfying. But even the lesser-paid jobs would have been clean and safe.

So don't turn up your nose at services sector jobs.

And get this: the extra jobs went disproportionately to older workers. Although people aged 45 and above account for only 31 per cent of the overall workforce, they accounted for 57 per cent of the growth in jobs.

But wait, there's more. Though we keep hearing about the growth in the quantity of our mineral exports as the new mines come on line, we've heard far less about the growth in the quantity of our exports of services, particularly education and tourism. (We "export" services when foreigners come to Oz to receive them.)

Our services exports have benefited greatly from the fall in our dollar, which has made them cheaper to foreigners.

Last year, spending by international students on course fees, accommodation, living expenses and recreation grew by 13 per cent to more than $19 billion. Spending by foreign tourists in Australia rose by 11 per cent to almost $16 billion.

What's more, our lower dollar has encouraged many Aussies to take their holidays at home rather than abroad. We now have more tourism money coming in than going out.

You well know it was exports to China that did most to fuel the resources boom. What nobody's bothered to tell you is that it's China and its growing middle class that's doing most to boost our exports of education and tourism services.

Don't underestimate the contribution services are making to "growth and jobs".

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Let’s stand against misleading modelling

Many people have been left with red faces following their part in last week's disastrous intervention into the negative-gearing debate by forecasters BIS Shrapnel. Let's hope they all learn their lesson.

This isn't the first time that "independent" modelling purchased from economic consultants has been used by vested interests to try to influence government decisions. Nor the first time the questionable results have been trumpeted uncritically by the media and misrepresented by the side of politics whose case it happens to suit.

But BIS Shrapnel's late entry into this dubious game has come at a time when the game's credibility is wearing thin and qualified observers are more willing to go public with their critiques of the quality of the modelling, the plausibility of its assumptions and the internal consistency of its findings.

As is common practice, various of the BIS Shrapnel model's findings were expressed in a highly misleading way. "Rents will rise by up to 10 per cent ($2,600) per annum", for instance, doesn't mean rents will rise by up to 10 per cent a year. It actually means that, by the 10th year, annual rents will be up to 10 per cent higher than they otherwise would be. Not nearly as bad as it was made to sound.

The first lesson for BIS Shrapnel is that when you publish commissioned modelling, but agree not to disclose who commissioned it, you attract a lot more criticism and scepticism. When it's not possible for those on the other side of the debate to say "they would say that, wouldn't they", they examine your assumptions and methodology a lot more critically.

Another lesson is that when what you're modelling looks like it's a party's policy but isn't, you should say so up front, not in mitigation after that party has denounced you from the rooftops.

Similarly, "unfortunate typos" saying $190 billion when you meant $1.9 trillion get you hugely adverse attention. Your "trust me, I'm an economist" line implodes.

I can't remember when so many economists of repute have gone out of their way to attack a modeller's findings, and done it so bluntly.

John Daley, of the genuinely independent Grattan Institute, referred to the report's "convoluted logic", "manifestly ridiculous predictions", "outlandish" and "fanciful" claims, and "implausible" and "unjustified" assumptions. It was "nonsense on stilts".

The lesson for other economic consultants is that the days when you could produce for a client a bit of happy advocacy posing as objective econometric analysis, and have the rest of the profession look the other way, are coming to an end.

There's now a far greater likelihood that other economists or economic journalists will subject your assumptions, methodology and findings to scrutiny and make their conclusions public.

There's now much greater familiarity with the standard tricks of the trade, such as misuse of the Bureau of Statistics' "input-output tables" to exaggerate the "indirect effects" of some measure; saying "employment will fall by X" when you really mean "the growth in employment will be X less than otherwise", or presenting effects that build slowly over many years as changes that occur fully in the first year and occur again in each subsequent year.

The lesson for relatively new treasurers trying to establish a reputation for economic competence, and the ability to explain complex economic concepts persuasively, is you'll never do it if you act like a political brawler and latch on to whatever third-party modelling seems to be going your way.

A treasurer looking for respect doesn't identify himself with any modelling before his experts – the economists in his department, not the ambitious young politicos in his office – assure him it's kosher.

If I was a subscriber to an Australian newspaper that led its front page with a wide-eyed account of BIS Shrapnel's findings as though they were established fact, only to have them exposed the same day as highly debatable, I wouldn't be impressed.

The lesson for the economics profession is that the modelling they value so highly is too often being used by other economists to mislead rather than enlighten. The reputation of models and modellers is being trashed, and with it the credibility of the profession.

If economists don't want to be regarded by the public as charlatans, they should consider the call by the Australia Institute – a noted debunker of misleading modelling – for a code of conduct for economic modelling. It would "require key assumptions to be revealed, context and comparison to be provided, and the identification of who, if anyone, commissioned the work".

Since the profession has failed to act, the institute wants the code implemented by governments.

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Why the economy is growing faster

So, the shock, horror economic news of the week was something good. The national accounts showed the economy grew a lot more strongly during the last part of last year than anyone was expecting.

Whereas economists – both on the official and the market side – were expecting growth in real gross domestic product of 0.4 per cent or less during the December quarter, leading to growth of 2.5 per cent for the year, the Australian Bureau of Statistics came up with figures of 0.6 per cent and (thanks to upward revision of growth in the September quarter) 3.0 per cent for the year.

Why? Because the statisticians found stronger growth in consumer spending – particularly spending on services – than people were expecting, as well as stronger exports of services.

In other words, our domestic economy – indeed, not just our internal economy but the household sector of our economy – is a bigger part of our destiny than many imagine.

It should be a lesson to those who assume that problems in other economies immediately translate to problems in our economy.

Or that problems in financial markets – particularly the sharemarket – immediately translate to problems in the "real" economy inhabited by you and me. That once the bad news starts, all the news is bad.

The lesson holds even though this week's news relates mainly to a period that began five months ago and ended two months ago, whereas the bad news about China and the sharemarket and all the rest came in the new year.

The first conclusion to draw from this week's accounts is that, if we enjoy a long period of exceptionally low interest rates and a significant fall in the value of our dollar, these forms of stimulus will eventually get the economy growing faster.

The second conclusion is that, thanks to the help of low interest rates and a low dollar, the economy's transition from mining-led growth to growth in the rest of the economy is proceeding satisfactorily.

The national accounts showed business investment spending falling by 3.3 per cent in the December quarter and by 10.1 per cent over the year, with most of that explained by the sharp drop-off in mining and natural gas construction.

On the other side of the transition, the first effect of low interest rates was to encourage a surge in the buying and selling of existing houses, leading to a rise in the prices of those houses and the building of a lot of additional houses.

Spending on building new homes and altering existing ones grew by 2.2 per cent in the quarter and by 9.8 per cent over the year.

Consumer spending grew by 0.8 per cent in the quarter (following upwardly revised growth of 0.9 per cent in the September quarter) to show healthy growth of 2.9 per cent over the year.

Explaining this isn't easy. Let's turn to the "household income account" - which means we switch from quoting real (inflation-adjusted) changes to quoting nominal changes.

We know that household income wouldn't have been growing too strongly because, although a lot more people got jobs in the December quarter, wage growth has been very low. Household income grew by just 0.4 per cent in the quarter.

And household disposable income grew by less than 0.1 per cent, mainly because payments of income tax grew by 1.2 per cent in the quarter.

And yet consumer spending grew by a remarkably strong 1.2 per cent during the quarter (that figure's nominal, remember).

How was this possible? It happened not because households "dipped into their savings" as was mistakenly reported, but because they chose to reduce the amount of what they saved from the quarter's disposable income.

According to the accounts, the nation's households reduced their saving during the quarter by $2.9 billion, dropping it to $19.5 billion. This means the net household saving ratio fell from 8.7 per cent of household disposable income to 7.6 per cent.

Remember that the estimate of household saving is calculated as a residual (income minus consumption), so it can be distorted by any errors in the other items in the sum.

It's not hard to believe the rate of saving has fallen, because for the past four years it's been edging down from its post-financial crisis peak of 11.1 per cent at the end of 2011.

Even so, last quarter's drop of more than 1 percentage point seems very big, about double the size of the biggest previous quarterly falls. It may be revised to a smaller drop.

The best explanation for households' falling rate of saving is that people are less worried about their debts and about keeping their jobs, with rapidly rising house prices in most cities leading them to feel wealthier than they were.

The decline in the rate of saving as house prices rise is pretty convincing evidence of a "wealth effect" helping to bolster consumer spending at a time when household income isn't growing strongly.

And the wealth effect coming via house prices helps tie the strength of consumer spending back to the period of low interest rates and its ability to stimulate spending in different ways.

The news of faster growth in production also fits with the already-known strong growth in jobs – particularly in the later part of last year – and modest fall in the rate of unemployment.

It makes the good news we've been getting on the labour market easier to believe because it's now more consistent with the story we've been getting from the national accounts.

Annual real GDP growth of 3 per cent is a fraction higher than the economy's newly re-estimated trend or "potential" growth rate of 2.75 per cent. And this above-trend growth is what's usually required to have the unemployment rate falling – as it has been.

Of course, whether growth stays at or a little above trend this year isn't guaranteed.

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Doctors share blame for a sick budget

Some of my best friends are doctors. These days, I even have in-laws who are doctors. I've just become a grandad and my tiny grandson stands a fair chance of ending up as a doctor, too.

But I'm still a journo, and have to do my job. So let me let me adapt something Kerry Packer said about a youthful Malcolm Turnbull: never get between a doctor and bag of money.

If you wonder why it will be so long before we get the federal budget back into surplus, doctors are part of the reason.

If, as Scott Morrison keeps telling us, the trouble with the budget is a spending problem, not a revenue problem, the government's decision last week to greatly increase our spending on defence has just made the problem a lot worse.

That's the problem with saying government spending is the problem. Politicians – of all stripes – are much keener on increasing spending than on reducing it.

A lot of the growth in spending – especially if you include the state governments – is coming from spending on healthcare. Part of it's the ageing of the population, but most of it's the higher cost of new pharmaceuticals, prosthetics and medical procedures.

There's actually nothing terrible about that. If we're getting a little more prosperous each year, what's more natural than that we choose to spend a fair bit of that increase on improving our health?

If so, the problem isn't our spending, it's our reluctance to pay for it. Which means the real problem with the budget is the aversion of pollies on both sides to confronting voters with that simple truth: if you want more spending on better healthcare you're welcome to it but, as with everything else in life, you'll have to pay more for it.

The problem with the debate about spending and taxing is that government budgets are so huge – about $430 billion a year, and a lot more if you add in the states – with so many taxes spent on such a multitude of things – that it's easy for each of us to lose our sense of cause and effect, in a way we'd never do with our own, household budget.

But to say that spending on healthcare should and will continue growing strongly – so the pollies had better learn to live with that fact – is not to say that every dollar spent on health is a dollar well spent.

Every doctor I know tells me there's plenty of waste in the health system. Governments should be trying to find and eliminate that waste, thereby giving taxpayers better value for money, as well as slowing the rate of healthcare spending's inexorable rise.

Here I have to tell you that, under the greatly improved leadership of federal Health Minister Sussan Ley, and after the public's summary rejection of the harebrained idea of imposing a $7-a-pop patient co-payment on GP visits, the Health Department is making a much better effort to identify and remove waste.

Trouble is, just because a payment is judged unnecessary doesn't mean there isn't someone for whom that payment is part of their income. Threaten to take it away and all hell breaks loose as they fight to protect that income. Especially if they're a doctor.

Late last year the Turnbull government proposed saving $650 million over four years by removing bulk-billing incentives for pathology services and reducing them for diagnostic imaging.

The boss of the nation's most powerful union, aka the Australian Medical Association, was out of the blocks within moments, prophesying death and destruction.

Doctors would have no choice but to impose their own charges on patients, many of whom would struggle to afford them, leaving some poor people declining to get the tests they needed.

Yeah, sure.

Some years ago the Labor government tried to save money by cutting the rebate for eye operations. The ophthalmologists created an enormous stink, telling every little old lady they could find they'd have to start charging thousands for a cataract removal and urging them to write to their local member.

It worked. The Labor government beat a hasty retreat. Some years later, a doctor mate told me everyone in medicine knew the opthos were raking it in. The fees in the medical benefits schedule had been set long before the procedure had become highly automated, allowing surgeons to do far more operations in a day.

Everyone in medicine knew this, but while the opthos were bludgeoning the government, they kept their mouths shut – a practice known as "professionalism".

It's a similar story with pathology rebates. Advances in automation have made the rebates far higher than they need to be – which is why the special bulk-billing incentives aren't needed.

And because automation also offers big economies of scale, we now have about three-quarters of the nation's pathology tests being done by just two big companies, both listed on the stock exchange – a small fact the AMA boss didn't feel he needed to mention.

For once, this isn't about greedy specialists. This is a fight to protect the excessive profits of two big listed companies. But please still write to your local member.

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