Saturday, November 26, 2016

Reduced competition may be slowing US growth

US financial markets may be betting that the Trump administration's budget policies will stimulate economic growth and inflation, but they're cheered by this prospect only because of deeper fears that America and the advanced economies have entered an era of persistently weak growth.

America's rate of growth has been slowing for decades, starting long before the onset of the global financial crisis.

As part of this, America's rate of productivity improvement has been weakening, despite a short-lived uptick in the 1990s.

So the hunt's been on for factors that may be causing this slowdown. There are many suspects. But one you often see mentioned by economists such as Professor Paul Krugman is a decline in the strength of competition in many American markets.

If markets are significantly less competitive, you'd expect this to mean consumer prices that are higher than they might be, profits that are higher, less innovation, slower productivity improvement, worsening inequality and slower growth.

But what's the evidence of reduced competitive pressure? Earlier this year President Obama's Council of Economic Advisers issued a paper reviewing the evidence, which I'll summarise.

There are various ways to measure the degree of "concentration" in an industry – that is, how much of the business done by an industry is captured by a small number of large firms.

Figures collected by the US Census Bureau show that, over the 15 years to 2012, the share of total sales revenue earned by the 50 largest firms in 13 broad industry categories fell in three, was unchanged in one but increased in nine.

If 50 sounds like a lot of firms, remember this is America, whose economy is about 12 times bigger than ours.

Sales concentration was highest among utilities – electricity, gas and water – at 69 per cent, which isn't surprising considering many are natural monopolies. Even so, concentration increased by almost 5 percentage points.

After that came finance and insurance, where concentration was up by 10 percentage points to more than 48 per cent, followed by transportation and warehousing (up more than 11 points to 42 per cent) and retail trade (up 11 points to 37 per cent).

This picture is confirmed by studies of specific industries, the briefing paper says. One study of the national market for loans found that, over the 30 years to 2010, the top 10 banks' market share increased by 20 points to 50 per cent.

For deposits, the market share increased from 20 per cent to almost 50 per cent.

Another study found that, for hospital markets over the decade to 2006, a common measure of concentration increased by about 50 per cent, to a degree equivalent to having just three equal-sized competitors in a market.

A different measure of possibly reduced competition comes from looking at what's happened to the rates of profitability of big firms.

When researchers take the rates of return on invested capital for listed US companies, then rank them from highest to lowest, they find that for firms at the 90th percentile (that is, 10 per cent down from the top; 90 per cent up from the bottom) their rate of return is five times higher than for the median (dead middle) firms.

A quarter of a century ago, the 90th percentile firms' rate of return was closer to twice the median firms'.

This suggests some firms are better able to extract "economic rent" than they were. Economic rent is the profit you make that exceeds what you'd need to earn to be willing to remain in the industry.

Yet another indication comes from the "long-term downward trend in business dynamism", as indicated by a steady decline since the late 1970s in the proportion of new firms entering markets each year.

This is while the proportion of firms exiting markets each year has been little changed. Since the entry rate has now fallen to be equal to the exit rate, the total number of firms – which used to grow by about 6 per cent a year – is now unchanging.

Part of the explanation for the decline in the number of new firms could be rising "barriers to entry" into many industries.

This could be caused by increased federal, state or local licensing requirements, ever-rising economies of scale or data-mining information advantages to incumbent firms, or successful lobbying for government rules to protect against new entrants.

Labour market dynamism – how often workers change employers – has also declined since the 1970s.

This could have many causes, including no-poaching agreements between employers and greatly increased occupational licensing, which limits people's freedom to move between states.

The briefing paper notes it's not yet clear how these various indicators suggesting the US may be suffering a fall in competition within its markets fit together.

Turning to possible causes of reduced competition, it notes the problem of "common ownership". Researchers have argued that institutional investors who are large owners of the biggest firms in a particular industry, implicitly encourage those firms not to compete with each other, thus raising the investors' profits.

According to other research, the role of institutional investors has grown over the past 30 years so that, in 2014, they controlled 61 per cent of worldwide investment assets.

One anti-competitive development the briefing paper doesn't mention is the US Congress's willingness to keep extending the lives of existing and future patents and copyright.

Meanwhile, US government trade negotiators use bilateral preferential trade deals – going by the Orwellian name of "free trade agreements" – and plurilateral deals such as the Trans-Pacific Partnership agreement to press partners like us to extend the lives of our patents and copyright to fit with the Yanks' domestic arrangements.

Maybe one reason economic growth is slowing is that the world's multinational corporations are getting too good at finding ways to inhibit competition between them, including by enlisting the help of governments.
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Wednesday, November 23, 2016

'Nanny state' is cover for exploitation by commercial interests

Oh no, the nanny state brigade is at it again. In their certainty they know what's best for us, they're back with their social engineering, wanting to punish us for being fat and use a tax on sugary drinks to push us towards "healthier choices".

On Wednesday the Grattan Institute will release a report urging the federal government to impose an excise of 40¢ per 100 grams of sugar on non-alcoholic beverages that contain added sugar.

What part of personal freedom don't they understand? If people want to drink sugary drinks, why should anyone else try to stop them? What harm are they doing to others?

Surely this is a matter of personal choice and responsibility. If being fat is bad for the health, it's up to the individual to accept responsibility for their own fate and decide to eat less and exercise more.

How much of our lives is the government going to take over? What willpower will be left if they keep doing more of this stuff?

Actually, I'm never convinced by these arguments from the professed defenders of our personal liberty.

Whenever I hear people banging on about "the nanny state" I wonder about their motives. Many of the critics are trying to keep government small so they're required to pay less tax.

These souls are often full of their own virtue. They attribute their comfortable circumstances entirely to their own efforts (forgetting the outside help they invariably had) and can't see why they should help others who aren't as disciplined as they are.

As for the libertarian think tanks leading the charge against the nanny state, you wonder how many of their undisclosed (but tax deductible) donations come from alcohol, tobacco and food companies anxious to resist any government measure limiting their freedom to profit from unhealthy products.

As the Grattan report – written by Hal Swerissen and Professor Stephen Duckett, a leading health economist – reminds us, there's little doubt that excessive overweight increases the risk of premature death, diabetes and cardiovascular disease.

Yet the incidence of obesity – a body mass index of more than 30 – is growing in the rich countries. The proportion of obese Australian adults is 28 per cent, up from less than 10 per cent in the 1980s. That's not counting the further 36 per cent who are overweight.

About 7 per cent of Australian children are obese, up from a negligible number in the '80s.

Although it may have plateaued among children, obesity continues to worsen among adults and seems likely to increase further.

Research suggests the main cause is overeating of processed food laced with sugar, fat and salt, which grows ever cheaper and available. The amount of exercise we get hasn't changed much over that time.

Health authorities and governments have been worried about an "obesity epidemic" for years, but nothing they've done so far seems to have worked.

This is probably because they've been tiptoeing around the powerful commercial food interests, focusing on individual responsibility, physical exercise and voluntary food labelling.

I agree it's time we did something more assertive and, though a tax on sugary drinks is far from a cure-all, it's a good place to start.

Lots of other countries are doing it, and have shown it works in discouraging consumption of sugary drinks and reducing obesity somewhat.

For us to impose it as a federal excise would be simple and administratively cheap. We already have excises intended to discourage us from smoking and overconsuming alcoholic beverages.

It would be paid by manufacturers and importers, then passed on to consumers, which would encourage people to move to bottled water, artificially sweetened drinks or even tap water.

A principle of libertarianism is that you should be allowed to do as you please as long as you're not harming others.

But as well as harming themselves, the obese also harm the rest of us. Evidence shows that, relative to others, the obese make more use of doctors, hospitals and pharmaceutical benefits.

All these impose higher costs on other taxpayers. Obese people are more likely to be on welfare benefits and less likely to be employed and paying income tax, which imposes further cost on other taxpayers.

Grattan estimates the cost to the rest of us is about $5 billion a year. The sugary drinks tax would recoup about $500 million a year of that.

Libertarianism assumes no one could possibly know our best interests better than ourselves. That's because we are unfailingly rational in the decisions we make. We have an iron will which stops us doing anything we later come to regret or being influenced by the behaviour of those around us.

In reality, all of us have a problem with self-control in at least one area of our lives and probably several.

And here's the bit nanny's critics never get: most of us are pleased when governments help us with our self-control problem by taking temptation out of our way.

Governments have used compulsory seat belts and random breath testing to reduce road deaths per head of population by more than 80 per cent. They've used sky high tobacco tax, bans on indoor smoking and other things to cut the rate of smoking by more than half.

It's high time they stood up to the processed food industry and did something effective about obesity.
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Monday, November 21, 2016

Our politicians go populist at their peril

If I were an Australian politician I'd think hard about the ascension of Donald Trump before I drew conclusions for local consumption.

When someone so unattractive surprises us by winning, it's tempting to conclude he must have done so because of a massive surge of anger over immigrants, Muslims and jobs lost through trade agreements.

We connect this with the Brexit surprise and the resurrection of One Nation and conclude we're witnessing a worldwide populist uprising against globalisation and "neo-liberalism".

Pollies on both sides wonder whether they should protect their backs by reverting to more protectionist policies, rejecting more Chinese investment and shouting louder about Australia-first.

But such a reaction much exaggerates the popularity of populism in America – as is clearer now more of the vote has been counted.

First, note that Hillary Clinton got over a million votes more than Donald Trump did. He actually got fewer votes than Mitt Romney in 2012 and John McCain in 2008.

How is such a wide discrepancy between the popular vote and the electoral college result possible? Because the many smaller states get a disproportionate number of votes in the college.

So Trump won because he got more votes in the right places – three or four smaller "swing states" in the midwest Rust Belt, which normally vote Democrat.

It's true Trump won these states because enough white males without college educations found his plain-talking and promise to "make America great again" – that is, bring jobs back to the Rust Belt – more attractive than establishing a Clinton dynasty.

But let's not kid ourselves America is seeing a nation-wide upsurge in populist protectionism, any more than One Nation's ability to exploit an ill-judged double dissolution represents an existential threat to Labor or the Coalition.

Next, remember populist sentiments can't be satisfied. They're about the expression of emotion – anger, frustration, envy, fear of foreigners, resentment of city-slickers and the better-educated – not about rational choices.

They're about wishing the world hadn't changed and wishing some saviour could change it back.

Populism is about ignoring the things that have changed for the good – such as much lower prices for clothes, groceries, hardware, electronic goods, cars and much else – and assuming we can reverse the changes we don't like without losing the benefits we've come to take for granted.

Populism is about explaining the decline in employment in manufacturing, and the shift in economic activity from the Rust Belt to the Sun Belt, solely in terms of free-trade agreements – which were made by governments and so supposedly can be reversed – while ignoring the much greater role played by technological change, which happened in spite of governments and can't be stopped by governments.

It's perfectly possible for America to make no further trade agreements, but only an American could delude themselves that their government could tear up longstanding agreements with other countries while those countries sucked it up.

Protectionist moves lead to retaliation by your trading partners. That leaves both sides worse off.

Consider all the wild promises Trump made to con the Rust Belt's white male workers into voting for him: a wall along the Mexican border, a 35 per cent tariff on Mexican imports and 45 per cent on Chinese imports, plus renegotiation of the North American free-trade agreement.

Assuming he wanted to, he can't actually do these things. Assuming somehow he could, they wouldn't fix the problem the way his dupes imagine, while introducing a new set of problems.

This says it won't be long before the Rust Belt's plain talkers realise they've been conned.

Add to them the majority that didn't want him in first place, and the many who held their nose and voted Republican because they couldn't stomach any Democrat, and it's not hard to see Trump setting records for the time it takes a president to become thoroughly on the nose.

Sound like a winning formula for our pollies to copy? Since populism fosters aspirations that can't be satisfied, it's suited to new, minor parties, but a high-risk tactic for parties that stand a chance of getting to government and having to deliver on the expectations raised.

None of this says the Rust Belt revolters don't have legitimate grievances.

A small group of business heavies and well-educated city-slickers has grabbed almost all the benefits from the structural change that's so disadvantaged the rust-belters, without governments – even Democrat majorities – doing much to oblige the winners to share with the losers.

For once in their lives, rather than going lower when they see the Yanks go lower, our pollies should, to quote Michelle Obama, "go high when they go low".
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Saturday, November 19, 2016

How we've grown for so long: safety valves and buffers

How has poor little Oz managed to keep our economy growing continuously for 25 years while, in the same period, other economies have suffered a recession or even two? We've had good insurance policies.

That's the answer the new Reserve Bank governor, Dr Philip Lowe, gave in a speech this week. As he explains it, however, it's a detailed story.

Actually, there are two parts to his explanation for our economic success: the first is our good "fundamentals" and the second is our ability to ride out the various "economic shocks" that hit every economy from time to time.

Lowe lists our good fundamentals as including our abundance of natural resources, our well-educated workforce, our "generally favourable demographics" (I think he means our growing population and that our ageing population isn't too aged), our openness to international trade and investment, our links with the fast-growing Asian region, and our demonstrated ability to reform the structure of our economy to boost its productivity.

Lowe adds that the reforms of the 1980s and '90s have given us a more flexible economy, one better able to roll with the punches than it used to be. He nominates three key areas of greater flexibility: our exchange rate, our conduct of monetary policy and our labour market.

Since we allowed our dollar to float in 1983, it has generally moved up or down in response to developments in ways that tend to limit inflation pressure and to stabilise growth.

Since we decided in the mid-1990s to let the central bank - rather than the politicians - make decisions about when to increase or decrease interest rates, as guided by the target of keeping inflation between 2 and 3 per cent on average over the medium term, we've kept the inflation rate reasonably stable and minimised swings in unemployment.

Since we ended the centralised wage-fixing system and moved to collective bargaining at the enterprise level in the first half of the 1990s, we've avoided wage inflation, kept real wages rising in line with improvements in productivity (until recently, anyway) and made employers less inclined to respond to downturns with mass layoffs.

These great areas of flexibility - the floating exchange rate, the independent, target-based approach to monetary policy (interest rates), and enterprise-based wage-fixing - have helped us avoid being derailed by economic shocks.

And it's not as if there's been a shortage of such shocks that could have derailed us, Lowe says.

First, there was the Asian financial crisis of 1997-98, which did derail some of our Asian trading partners. Then there was the bust of the US tech boom - the Tech Wreck of 2001 - then the global financial crisis of 2008-09.

 As well, there's the resources boom. With its once-in-a-century surge and then collapse in coal and iron ore prices and consequent surge and falloff in mining construction, the resources boom was a massive, decade-long shock to our economy.

Australia's economic history is littered with commodity booms soon leading to recessions, but not this one (except in Western Australia, thanks to mismanagement by its state government).

But all that's just by way of background. Lowe's main point is to draw attention to the way our possession of certain "buffers" absorbs some of the blow when shocks hit.

We build up and hold these buffers as a kind of insurance policy against the day when trouble arises. Like all insurance policies, they come at a cost. There's a premium to be paid.

So where do you find these buffers? On the balance sheets of banks, governments and households. They're about ensuring your assets exceed your liabilities by a decent safety margin, in case some unexpected problem arises.

In the years leading up to the global financial crisis, our banks maintained higher ratios - of their shareholders' capital to their lending to borrowers - than did banks in America and Europe.

That's why our banks were able to keep lending after the crisis, whereas the others weren't. Their inability to keep lending amplified the original shock.

In the years since then, international authorities have imposed higher levels of capital adequacy and liquidity on the world's banks, including ours.

These greater restrictions make banks safer, but also reduce their profitability. We're still waiting to see how the cost of this insurance premium will be shared between our banks' customers and their shareholders.

At the time of the financial crisis, our government had "positive net debt" - it had more money in the bank than it owed to people holding its bonds.

This made it a lot easier for our government to support the economy by borrowing and spending. Now, Lowe argues, we need to gradually move the budget from deficit back to surplus, rebuilding our fiscal buffer for the next time it's needed.

The total debts of our households have risen to 185 per cent of their annual disposable income. This is a lot higher than for other rich countries, but that's partly because unusual distortions in our tax system encourage borrowing for rental properties to be done by individuals rather than big companies.

More to the point, households have been building up buffers by using mortgage offset and redraw facilities to reduce their net debt by 17 per cent of the gross debt, in the process getting a collective 2½ years ahead of their scheduled repayments.

More than half of all households with mortgage debt, at each level of income, are ahead on their repayments.

If you subtract from our households' debt all the money they hold in currency and bank deposits, the nation's households' net debt falls to about 100 per cent of their annual disposable income.

Our household debt is high, but we've got a fair bit of buffer.
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Wednesday, November 16, 2016

How to get more job satisfaction

How about we take a short break from worrying about the new job Donald Trump has lined up for himself and think about our own jobs.

It surprises me that we spend so much time working – many of us in jobs we don't much enjoy – but are more inclined to seek escape from our work in fiction, or by following the adventures of celebrities such as Trump, than to think about how we could get more satisfaction from all that heads-down time.

It's not a subject of interest to our politicians nor, I fear, many of the bosses we do the work for.

Yet the fact is that psychologists – and even the odd economist – know a lot about what makes some jobs more satisfying than others.

Research published in 2014 by the British Cabinet Office examined the life satisfaction of people working in 274 occupations.

The 10 occupations seeming to yield the greatest satisfaction were, from the top: clergy, chief executives, farm managers, company secretaries, quality assurance regulators, health care practice managers, doctors, farmers, owners and managers of hotels and accommodation, and skilled metal, electrical and electronic trade supervisors.

The 10 occupations seeming to yield the least satisfaction were, from the bottom: plastics process operatives, bar staff, care escorts, sports assistants, telephone sales people, floor and wall tilers, industrial cleaners, debt and rent collectors, low-skilled construction workers and pub owners and managers.

From a quick squiz, it seems the most satisfying jobs tend to be better paid than the least satisfying. (With clergy as an obvious exception. If my dad's pay was any guide, revs aren't rolling in it.)

But if you conclude from this that finding a high-paying job is the best path to a satisfying job you've got the wrong end of the stick.

No, the clearer distinction between the two groups is that the most satisfied tend to be more highly skilled than the least satisfied.

As a rule, work skills tend to be scarce, with employers' demand for them stronger than workers' ability to supply.

So it's reasonable to infer that acquiring skills for which there's strong employer demand is a safe path to a high-paid job.

But there's another distinction between the two groups that does most to explain the satisfaction difference: the most satisfied are nearer the top of the heap, whereas the least satisfied are near the bottom.

It's nice to have status – people treat you with more respect. And it's nicer to do the bossing than to be bossed.

The psychologists will tell you, however, that the most important thing in job satisfaction is personal autonomy: having a degree of freedom in the way you do your job.

Feeling that, at least to some extent, you're controlling the system rather than the system controlling you.

These things take you a long way towards having a sense that you're achieving something. And that's another characteristic of satisfying work the psychologists have identified.

A third characteristic is a degree of complexity and variety. It's obvious enough that we like a bit of variety in our jobs rather than repeating the same tasks day in, day out.

Less obvious is that we like jobs that present us with a challenge – provided it's a challenge we can meet. Jobs that demand the impossible aren't satisfying, but nor is a job that's so easy it's a bore.

One of my favourite websites, PsyBlog, run by the British psychologist Dr Jeremy Dean, nominates a fourth "key to job satisfaction": fair pay.

Note, not high pay, but fair pay. How much is fair? This is the bit so many employers don't get in their fashionable preoccupation with performance pay and bonuses linked to KPIs (if you don't know what those letters stand for, think yourself lucky).

Fair pay is pay that's the same as received by people you consider your equal. We accept that people with more responsibility than us should get more, but we get twitchy when we know or suspect the boss is playing favourites among our peers.

It's clear bosses could do a lot to improve the satisfaction of their troops by avoiding favouritism, giving people at every level a little more freedom and flexibility, treating people lower down with more consideration and respect, and doing more to get individuals into the jobs their personal characteristics make them more suited to.

Dumb bosses live in fear that treating their staff well would allow them to slacken off. The KPI craze is intended to oblige people to work harder, but also to control more narrowly the way they do their jobs.

KPIs should come with a safety warning: careful what you wish for. They invite staff to turn off their brains – just as soon as they've figured out what aspects of their job they can neglect so as to ensure they always hit their targets.

Smart bosses know that treating their workers well, giving them discretion and encouraging them to keep their brains on pays off in greater effort and loyalty, as well as reducing staff turnover, recruitment and initiation costs.

If you don't have the good fortune to work for a smart boss you can use what wriggle room you can manage to make your job more challenging and psychologically rewarding. Failing that, find a better boss.
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Monday, November 14, 2016

Little right, much wrong with Trumponomics

For years I've wondered how America's business elite could grab almost all the proceeds of the country's growth, leaving real wages permanently stagnant, without having ordinary workers rioting in the streets.

Now I know. The anger kept building until a political huckster called Trump found the way to exploit it for personal advancement.

The bitter joke is that the populist promises he made to keep out Muslims, Mexicans and Chinese imports would do little to make the mug punters better off, whereas many of his more conventional economic policies will do much to further fatten the pockets of the 1 per cent the punters so resent.

While we wait to see which promises he acts on, the best guess is he'll implement those of his policies that fit with Republican orthodoxy.

After all, he'll be relying on the usual Republican suspects to make up his cabinet and relying on Republican majorities in Congress to put his policies into law.

This suggests he'll be quick to start phasing corporation tax down from 35 per cent to 15 per cent, and lowering all rates of personal income tax (though not necessarily in a way that favours low and middle earners).

He's likely to increase defence spending and maybe even keep his promise to fund a much-needed urban infrastructure renewal program.

But surely this would cause a huge expansion of the still-excessive federal budget deficit, wouldn't it?

Yes, but that's unlikely to stop it happening. It is, after all, similar to what Ronald Reagan did on coming to office in 1981.

We're about to see confirmation of an eternal truth of American politics: the Republicans care hugely about the evils of debt and deficit – it keeps them awake worrying about what we're leaving for our children and grandchildren – but only when there's a Democrat in the White House.

For the most part it will be a giant exercise in trickle-down economics – even though many of the people who fell for Trump's crude charms now rightly see it for the voodoo economics it mainly is.

Protectionism may be the new saviour – in Nick Xenophon's Oz as well as Trump's Rust Belt states – but it's still the delusion it always was. It seems "only common sense", but that doesn't mean it works.

In any case, were Trump to impose a huge tariff on Chinese imports, do you imagine that would re-open the ghostly steel mills in Gary, Indiana, or the rusting automobile plants down the road from Michael Moore's place in Flint, Michigan?

Turning back globalisation is no easier than turning back time. The main thing you'd do is rob working people (and the rest of us) of access to the one aspect of globalisation they've clearly benefited from: imported goods much cheaper than the locally made goods they replaced.

Don't kid yourself: some lost their jobs in factories, but all workers – most of whom never worked in manufacturing – benefited from lower prices.

That's why there's no free lunch in protection: it's a scheme where the fortunate few are subsidised by the less-favoured multitude. It's not foreigners who lose out, it's other locals.

And don't kid yourself on this: far from all the jobs lost from manufacturing were lost through import competition.

Far more than many oldies realise were lost through computerisation. That's a big part of the reason reimposing high tariffs would do surprisingly little to restore manufacturing employment.

It's a convenient delusion that globalisation is solely the product of "neo-liberal" deregulation. Its other, bigger driver is technological advance and the digital revolution. Think any pollie can stop that?

This isn't to say scuttling the Trans-Pacific Partnership free-trade agreement would be any loss. It offered trivial benefits to us, in return for giving foreign multinationals power to push our government around.

Just because preferential trade deals are called "free-trade agreements" doesn't make them a good thing. The US's primary goal in its many agreements is to advance the interests of its exporters of intellectual property, while continuing to protect its farmers.

Its trans-Pacific deal was intended as cover for the bilateral deal with Japan hidden within it, as well as strengthening America's trading links with all the main Asian economies that weren't China.

The Yanks may be paranoid about the rise of China, but the joke is there never were two big economies – the two biggest – more interdependent. The US is China's largest trading partner, while China is the US's second-biggest – and its biggest creditor.

The Yanks are really stoopid​ enough to take a crack at Chinese imports? Trump is a cunning con man, not an idiot.
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Saturday, November 12, 2016

Why Trump won't be as big and bad as many fear

Sorry, but I find the ascent of Donald Trump more fascinating than frightening. If it's all going to be so terrible, how exactly is he going to make it happen?

If you take literally all the things he's said he'll do, it will be a disaster. But anyone who believes all the things politicians say in the heat of election campaigns isn't too bright.

It wouldn't surprise me if many of the people whose votes got him elected don't know half of what he promised, don't much care what he promised and certainly don't expect him to deliver.

They voted for him because, in their anger with the business and political establishment, they wanted to give the system a kick up the bum. The less he sounded like a proper politician, the more they thought him the man for that job.

Because Trump isn't part of the standard two-party system and didn't win the election the orthodox way, it's more relevant than usual to ask what motivated him to run for president.

It wouldn't surprise me if he was more interested in proving he knew the right buttons to press to be president, or was popular enough to be president - that he could ensure he was the last contestant voted off the island - than he was in actually doing a list of things to "make America great again".

How keen will he be to take on four years of 18-hour days making unending judgment calls?

When you think of all the struggle needed to "drain the swamp", he strikes me as more Phony Tough than Crazy Brave.

Much of the commentary we've seen so far is very "great man theory of history". Trump is such a wild man, he'll single-handedly destroy the American alliance, end America's world supremacy, start a global trade war that reverses globalisation and resumes the Great Depression, and maybe provoke a shooting war with China.

Was that in his first term, or would it take two?

Sorry, I lean more to the view that history is a product of pre-existing trajectory, random developments and the interaction of powerful political and social institutions.

They say that in the race of life, you should always back Self-interest because at least you know it's trying. I'd also put a couple of bob on Inertia.

In the coming history of the Trump administration, I see big roles for self-interest and inertia, aka the status quo.

Start with the Republicans. The hated usurper Trump, rather than dumping them in it, has had a famous victory in their name, ensured Republican majorities in both houses of Congress, and acquired control over countless perks and preferments.

If you were in the Republican caravan, what would you be doing? Sucking up.

There's an army of worthies - academics, think-tankers, bureaucrats, retired generals, former lobbyists, business people and Wall Street bankers - who spend their careers moving in and out of taxpayer-funded jobs in Republican administrations.

Trump will be knocked over in the rush to be his special friend. The thousands seeking a gig will have two dominant motivations: a share of the spoils of office and a say in the shaping of policy.

There's probably only one Republican in the country who agrees with every item on Trump's supposed to-do list, and that's the man himself.

If so, every other Republican will be hoping to persuade Trump to drop this, tone down that, add this and put that one on the backburner.

Do you really think he's going to spend his 18-hour days ensuring every bright sales idea written on the back of an envelope during the campaign remains inviolate?

What about all the real, professional econocrats, diplomats and generals? "Alienate our closest allies? Start a trade war? Good idea, Mr President."

Remember, too, that presidents often have trouble getting their policies passed by Congress, even when it's of the same political colour.

There's far less party discipline in the American political system, with individual congress people requiring a small bribe (hopefully, only something for their constituency) before they toe the party line.

They're also anxious to keep sweet with the main interest groups that contributed to their campaign costs.

Which brings us to Washington's other big industry, the lobbyists. They're going to meekly bow before Trump's sacred list of bright ideas, are they?

No, they're going to go on doing what they're so handsomely paid to do: mould the actions of president and Congress to fit the perceived interests of their generous customers.

Who are these big-spending interest groups? Well, the ones with the most money to splash around are the ones representing the most successful and powerful industries. The gun industry, for instance.

But, right at the head of the list, Wall Street - the people whose greed caused the global financial crisis, who got bailed out by the taxpayer, avoided going to jail and left millions of ordinary people to pick up the pieces of their lives.

Many of those ordinary people are those who voted for the larrikin Trump, hoping he'd give Wall Street an almighty kick up the bracket - he being a regular plain-talkin' guy, just like them.

Get it? The business and political establishment is still running the place, still ensuring their interests are put ahead of those of the lesser mortals silly enough to vote for Trump.

Now Trump has no choice but to turn to them, seeking their help in running the joint and implementing his brave plan to put them and their paymasters back in their box.

They'll be falling over themselves to help - and mould the egotistical Trump to their masters' will.

It's a recipe for inertia and preservation of America's system much the way it's always been.

Trump's amazing defeat of the political establishment isn't so much the revolt of the put-upon punters, as just another political con job.
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Thursday, November 10, 2016

Don't jump to conclusions on big bad Trump

Keep your shirt on. The world as we know it may be ending, but if so it won't be for a while. And maybe things won't change as much as feared.

Yesterday the experts were confidently predicting Hillary Clinton would be president. Today they are predicting Donald Trump's presidency will be a disaster with equal confidence. How do they know?

I find it hard to imagine Trump's ascendancy won't end up being bad for our economy, for the rest of the world and the Americans themselves.

But that's a long way down the track and lots of unexpected things could happen between now and then. Maybe even a few good things.

The thing of which I'm most certain is that the election of a climate change-denying president will further delay a serious response to the challenge by America and, through its bad influence, the rest of us.

But, hey, we are probably too late already. So no (extra) harm done. And Donald, you and I will be dead long before it gets really bad.

Sorry, back to the present. Don't forget the guy doesn't even get the job until January. And even then he may not yet have assembled the full range of his thousands of appointees.

Not that there is likely to be any shortage of volunteers. They won't be America's finest, but there will be plenty of people keen to be the president's friend.

The delay will give Wall Street and the world's share markets plenty of time to change their mind about Trump - several times.

Remember, share markets took no time to decide Brexit was the end of the world and only a little more to decide it wasn't.

And every new presidency starts with a honeymoon, in which all the people who voted him in rejoice - a new start for America! - some of the people who didn't wish they had, and everyone is glad to be shot of the last lot and all their failings.

Nothing very bad will happen in the honeymoon.

If one of the first new policies to go forward is Trump's plan to end decades of neglect by renewing America's public infrastructure, that would be a good thing of itself, would boost the US economy and spread a little growth on to the rest of us.

At the other extreme, should Trump lose no time in starting a trade war with China, everyone would lose - the US, China and the rest, with Australia prominent among those last.

This is where we must trust that America's celebrated "separation of powers" comes to the rescue, allowing other, wiser heads to prevent Trump from being as foolhardy as he said he would be.

Of course, the one prediction every Aussie voter can make made with confidence is that Trump, being a politician, will fail to keep most of his promises. Good.
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Wednesday, November 9, 2016

Maybe the end of economic growth draws near

If you think the possible ascension of Donald Trump is our one big worry you haven't been paying attention. Some climate scientists are worried sick over the possibility that climate change may be passing the point of no return while we procrastinate over controlling it.

Meanwhile, the nation's – nay, the world's – economists worry that the wellsprings of economic growth are drying up in the developed countries. Think of it – an economy without growth!

On Monday the Productivity Commission issued a discussion paper exclaiming that there is "justified global anxiety" that improvements in productivity and the growth in national income they cause have "slowed or stopped".

In my job I'm not supposed to say it but, sorry, I'm a lot more worried about inaction on climate change than the feared end of economic growth – if for no other reason than that going backward must surely be worse than not going forward.

Why can't most economists see that? Because climate change is not their department. They're meant to be experts on how to make economies grow, and that's all they want to talk about.

Most economists I know never doubt that a growing economy is what keeps us happy and, should the economy stop growing, it would make us all inconsolable.

They can't prove that, of course, but they're as convinced of it as anyone else selling something.

I'm not so sure. I'm sure a lot of greedy business people would be unhappy if their profits and bonuses stopped growing, but I often wonder if the rest of us could adjust to a stationary economy a lot more easily than it suits economists and business people to believe.

And get this: there is a fair chance we may get to find out if I'm right.

The economy – the amount of economic activity, measured as annual production of goods and services – grows as the population and, more particularly, the amount of work being done, grows.

The economy also grows when we save some of our income from producing goods and services and invest it in additional productive equipment – machines, buildings, infrastructure – thus making our workers capable of producing more goods and services with each hour they spend.

But here's the bit many scientists and others don't get: the secret sauce of economic growth is our ability to produce more goods and services this year than we did last year even with the same quantity of labour and capital equipment.

This is the pure essence of economic growth: improved "productivity" – productiveness. How is it possible? Mainly by giving workers not just more machines, but better machines; machines that do better tricks. By technological advance.

And also, these days, by using further education and training to make our workers capable of doing fancier tricks – including working with more sophisticated machines – and organising work in better ways.

This essence of productivity – which economists call "multifactor" productivity – is what seems to be drying up. In Australia, according to the eponymous commission, it hasn't improved since 2004.

But it's much the same story in all the developed economies. Many economists are starting to accept Harvard professor Lawrence Summers' revival of the theory of "secular stagnation" – that we've entered a lasting period of little or no growth in national income (gross domestic product), especially income per person.

What's helping to persuade them is the argument of another American economist, professor Robert Gordon, perhaps the world's leading expert on productivity.

His contention – which no young person would believe – is that the slowdown in measured productivity improvement has occurred because there is now much less innovation than we became used to over the past century.

Despite the unending wonders of the digital age, and the digital disruption of industry after industry, they just don't compare with the life-changing and economy-transforming technological advances of the past: electricity, the internal combustion engine, even underground water and sewerage.

We spent all of last century fully exploring and exploiting the potential just of electricity – from light bulb to production line to dishwasher to the computer and all it has spawned.

But there's more to Summers' secular stagnation. He argues that population ageing is leading people in the West to save more, while digital innovation and weak population growth are reducing the need for much new physical investment by businesses and governments.

Higher saving and lower investment equal permanently lower interest rates and lower economic growth.

Well, possibly. A rival theory is that the digital revolution and the shift from more goods to more services is changing the economy in ways that the economists' conventional measuring system is incapable of picking up.

We're still getting better off, but in ways that aren't showing on the economists' dials. It's certainly true that much of the time-saving and convenience flowing from the internet is not measured by GDP.

That's been my big problem with economists' obsession with economic growth. It defines prosperity almost wholly in material terms. Any preference for greater leisure over greater production is assumed to be retrograde.

Weekends are there to be commercialised. Family ties are great, so long as they don't stop you being shifted to Perth.

But I'd like to see if, in a stagnant economy, we could throw the switch from quantity to quality. Not more, better.
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Monday, November 7, 2016

Turnbull and Morrison to fix the budget without really trying

There are a lot of -isms in economics – Keynesianism​, monetarism and many more – but it's now clear the Turnbull government is an adherent to Micawberism.

Mr Micawber, you recall, was the Dickens character who summarised his philosophy of life as: "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Micawber's life was miserable because he often found his finances in deficit. A bit like an Australian government post-global financial crisis.

His solution to the problem never changed. He was always waiting and hoping for "something to turn up".

We've now seen enough of the Turnbull government to realise it, too, is doing little more than hoping something eventually turns up to get the budget back to surplus.

To be fairer to the government than it deserves, the main reason repair of the budget's taking so much longer than expected is not because of any great laxness in the control of government spending, but because tax collections have grown so much more slowly than could have been expected, for reasons beyond its control.

Its revenue forecasts have repeatedly fallen short because export prices have fallen much further than expected and because the rates of price and, more particularly, wage inflation have slowed to rates unseen in decades.

Even so, successive treasurers have insisted the budget has a "spending problem, not a revenue problem". They say this; they haven't acted on it.

They've used this false claim to resist pressure to increase taxes (apart from allowing bracket creep, which the weak growth in wages has made far less potent than usual) but, after the public's resounding rejection of the Coalition's first budget, they've made no real attempt to repair the budget by making net cuts in government spending.

If that assertion surprises you it's because you've been bamboozled by the government's actual spending policy: to ensure all new spending programs are offset by cuts to existing programs.

So the unending stream of fights to get these and those spending cuts through the Senate are merely an attempt to hold the line on spending growth, not to slow it down.

That there are so many new spending programs needing to be offset is a demonstration of how utterly unrealistic is the government's professed goal of "smaller government".

The government's lack of enthusiasm for net spending cuts is shown by the increasingly piddling, penny-pinching nature of the cuts it wants to get through Parliament.

Raise the departure tax by $5; tax backpackers for the few months they're here; cut the dole by $4.40 a week; think of further ways to deny benefits to single parents and the disabled.

If you've been a budget-watcher for a few years, you can tell such measures come straight out of the bureaucrats' bottom drawer, where they've been kept for the day when the government was desperate enough to need then.

Their piddling nature is a sign that, in the search for spending cuts affecting only politically weak interest groups, the government is close to the bottom of the barrel.

Actually, what it shows is that even the policy of making departments come up with offsetting savings to cover new measures is running out of puff.

Now, be clear on this: in drawing all this to your attention, my purpose is not to criticise the government for failing to slash spending and the deficit, merely to highlight the yawning gap between what it says about budget repair and what it's actually doing.

So if its true strategy is merely to wait for something to turn up that gets us back to surplus, what could turn up?

This is where its prospects are brighter than Mr Micawber's. Coal and iron ore prices are a lot higher today than they were at the time of the budget in May. If this lasts it will do a lot to restore the growth in tax collections.

Nor is it wildly optimistic to expect that price and wage inflation will recover over the next year or two, putting some bite back into bracket creep.

But much help could come from the recalcitrant Senate. This year's budget included big tax increases – in tobacco excise, superannuation and multinational tax avoidance – intended to partially cover the ever-growing cost of cutting the rate of company tax by 5 percentage points.

If, as seems likely, the Senate accepts the tax increases but declines to pass the company tax cut on to big business, in time the budget should be well ahead on the deal.
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Saturday, November 5, 2016

This year changed the politics of tax reform

The disease known as "confirmation bias" is endemic among economists. They have a marked tendency to remember events that seem to confirm the correctness of long-held beliefs, but forget developments that challenge their prejudices.

So their pre-existing notions about how the world works become ever more firmly held.

In which case, let me remind them - and you - of the view-changing lessons about tax reform they probably haven't learnt from the results of recent elections.

Economists, politicians and business people have long-held views about which tax reforms are relatively easy to bring about politically, and which aren't.

But some of these assumptions have been turned on their head by the Turnbull government's poor showing at the election in July, and by the comfortable re-election of the ACT Labor government last month.

In this year's federal election, tax reform was perhaps the biggest single issue. It was, you recall, the one to which the Coalition government was expected to bring a package of comprehensive tax changes, following a green paper and white paper decision process.

The process didn't happen, nor were either Tony Abbott or Malcolm Turnbull willing to propose the much-mooted increase in the goods and services tax.

There was no package as such, just a collection of tax measures announced in the budget brought down just before the election campaign started.

The big one was a plan to reduce the rate of company tax from 30 per cent to 25 per cent, phased in over 10 years, with smaller companies going first and the cuts not reaching big business until 2024.

This was the centrepiece of the government's claim to have a "plan for jobs and growth". To this it added a tiny income tax cut of up to $6 a week for the top 20 per cent of taxpayers, earning more than $80,000 a year.

But the budget included various tax increases to help pay for these tax cuts. It pinched Labor's plan for a further big, phased increase in tobacco excise, and adopted its own versions of Labor's plans to cut back tax concessions on superannuation and extract more tax from multinational corporations.

Labor had been first to put its tax reform cards on the table. It proposed also to phase out negative gearing of property investments and cut the discount on capital gains tax.

The government considered its own measure to reduce negative gearing, but finally decided to do nothing, thus leaving itself free to claim Labor's plan would wreck the housing market. Product differentiation.

But here's our first lesson on the politics of reform: it's a lot easier for governments to propose possibly unpopular reforms when the opposition has already stuck its neck out, or when cabinet has reason to believe the opposition won't attack it for acting.

We can deduce from opinion polling, from the debate during the campaign and from the election outcome how these various reform measures went down with voters.

The tobacco excise increase, the crackdown on multinational tax avoiders and the tiny tax cut hardly rated a mention in the campaign.

Had the small but expensive tax cut not be made, it's doubtful if the Coalition would have lost many votes. Bracket creep is rarely a biting election issue.

The crackdown on multinationals was probably intended to answer the criticism that companies hardly need a tax cut when they were already paying very little, but it could just as easily have reminded voters of this argument.

The super changes attracted little discussion publicly, but did anger some well-lined Liberal supporters. After the election the measures were toned down accordingly.

But it's hard to believe the Libs lost many votes over it when Labor had similar proposals. Nor that many people loaded enough to have a problem with the super changes would have switched their vote to One Nation, as some claim.

It seems pretty clear the cut in company tax wouldn't have gained the Coalition many votes it didn't already have, but probably lost it quite a few.

The public has little sympathy for big business - can't think why - and the claim that the benefit of company tax cuts would trickle down to the rest of us wasn't believed.

Even the government's own modelling showed the belated effect on "jobs and growth" would be minor. For the punters, the link was impossible to see.

By contrast, the government's attack on Labor's negative gearing policy didn't stick and the policy may have gained more young voters than it lost from older property investors.

Economic theory tells us taxes on land are about the most economically efficient - doing least to distort the choices people make about working, saving and investing - of all taxes.

They're particularly attractive when the increasing ease with which financial capital can be moved between tax jurisdictions is used as a key argument for reform, including increasing the GST. Land is immovable.

Land tax is also much fairer - "progressive" - than "regressive" GST, which takes a higher proportion of lower incomes than higher ones.

The value of the land people own tends to be highly correlated with their overall wealth.

But many reform advocates say raising land tax would be even harder politically than raising the GST.

Well, they should note the case of the Labor government in the ACT, which got comfortably re-elected even though it has been implementing a reform long advocated by tax economists: slowly phasing out stamp duty on property conveyances while phasing in a universal land tax.

Of course, there are no controlled experiments in economics, and many factors - notably, perceptions of a government's general competence - play a part in election outcomes.

Even so, this year's elections cast doubt on some supposedly self-evident truths in the politics of tax reform: that company tax cuts won't be a problem, whereas negative gearing, superannuation and land tax are untouchable.
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Wednesday, November 2, 2016

Pick on the weak and friendless to pretend to fix the budget

Did you know our social security system is so open to rorting that it's possible for some people to get more from benefits than they'd earn if they took a job? And we wonder why we have problem with debt and deficit.

This scandalous state of affairs was leaked to an  Australian newspaper by sources close to the minister for Social Services, Christian Porter.

Specifically, single parents with four children can get welfare payments of more than $52,000 a year if they don't work, but less than $50,000 after tax if they work and receive the median full-time wage.

Small problem with this appalling news. It's a cock and bull story.

The welfare experts took no time to demolish it.

For a start, it's a contrived example. How many people do you know with four dependent children? There must be some single parents with four kids, but they'd a small fraction of all welfare-dependent single parents and an infinitesimal fraction of the 5.2 million recipients of federal "income support".

Worse, it's a false comparison. If the sole parent took the job they'd still be eligible for the $32,000-odd in family tax benefits per year. By supposedly preferring to accept the "parenting payment single" of less than $20,000, they'd be passing up the median full-time wage of almost $50,000 after tax.

What Porter doesn't seem to know is that family payments are specifically designed to be the same whether parents are working or not, precisely to ensure they don't discourage parents on benefits from taking a job.

So the Minister for Social Services has grossly misrepresented the workings of his own system.

Relative to people like Joe Hockey and Scott Morrison, Porter seems smart and well-spoken, eminently capable explaining a tricky concept in simple words. He's next most likely to be treasurer.

So why did he risk his reputation by putting out a line that was so quickly and easily debunked?

Perhaps because he thinks it's his job to convince us that the allegedly unsustainable growth in welfare spending is the main reason for our debt and deficit.

And because it's the job of he and his ministerial offsider, Alan Tudge, to counter the Senate's reluctance to agree to a range of cuts in the dole and other welfare benefits by creating the impression in voters' minds that welfare spending is rife with rorts and rip-offs by the undeserving poor.

Also because the Liberal heartland is desperate to believe they won't have to pay higher taxes if the welfare bill can be chopped back to size. Worse, I suspect Porter and Morrison actually believe it.

In a speech a few weeks' ago Porter worked hard to demonise his own portfolio, grossly exaggerating the size of the problem.

Today's "welfare spend" is about $160 billion a year. This makes it the largest category of (federal) government spending, representing 80 per of all individual income tax collections, he says. (Except that personal income tax represents only about half of all the federal tax we pay. Oops.)

He wants us to assume most of this $160 billion goes on people who could work, but won't: dole bludgers, sole parent bludgers and people on disability pensions pretending to have bad backs.

Except that half the money goes to bludgers who don't want to work because they're over 65. Another quarter goes to bludgers with children (the family tax benefit) or young mothers wanting subsidised childcare so they can do their bludging at work.

Most of the alleged projected "unrestrained growth" in the welfare spend will come from the continuing retirement of the baby-boomer bulge and the success of investment advisers in helping people get the age pension despite their big super payouts.

Have you noticed how many political fights in recent times arise from the government's efforts to get penny-pinching spending cuts and tax changes through the Parliament?

There's the tax on backpackers, the removal of the "energy supplement" worth $4.40 a week or so to pensioners and people on the dole, the cuts in family payments that would hit sole parents hardest, the cuts to make people wait four weeks before they get the dole and raise the eligibility age for the adult dole to 25, and even the move to stop evil maternal double-dippers using employer-provided paid parental leave to prolong the period they have at home with the baby.

Porter says we can't continue to borrow money to fund today's welfare system growth because this would burden young Australians.

He avoids admitting that apparently we can continue to borrow money to cover a tax cut for people earning more than $80,000 a year, hugely expensive cuts in company tax, a much-delayed crackdown on multinational tax avoidance and a massive increase in spending on defence.

Heard of priorities, Christian?

These penny-pinching cost cuts aimed mainly at the socially disadvantaged and politically defenceless – if roughing up asylum seekers and their kids goes down so well with voters, why not extend the attack to bottom-of-the-pile Aussies? – are far from sufficient to make much impact on the budget deficit.

They show the government is near the bottom of the barrel in the quality of budget savings it's prepared to make.

It wants us to believe the federal budget is close to bankruptcy but, in truth, it's this government that's nearer to being morally, politically and economically bankrupt.
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Monday, October 3, 2016

If the economy’s acting dumb, don’t blame the econocrats

Has it occurred to you that, with the Reserve Bank now run by Dr Philip Lowe and his deputy Dr Guy Debelle, Glenn Stevens may have been the last governor we'll see without a PhD?

All Stevens and his predecessor, Ian Macfarlane, could manage was a master's degree.

Of course, nothing is certain. After Dr Ken Henry was succeeded as Treasury secretary by Dr Martin Parkinson, I convinced myself the era of PhD-only secretaries had arrived at Treasury.

Wrong. It didn't occur to me that Tony Abbott would intervene, sacking Parkinson and replacing him with John Fraser (honours degree), a throwback to Treasury's (John) Stone Age.

My point is to remind you that the nation's top econocrats get ever-better educated. And take my word for it – they're not just highly qualified, they're whip smart.

When you spend as much time talking to them as I do – mainly before they make it to their top slots – you have to keep reminding yourself how exceptionally bright they are to stop you underrating your own brainpower.

They're the kind of people who – while you were at uni chasing the opposite sex, playing at politics or just goofing off – were swatting flat out, preparing for every lecture and starting early on every essay. You skimmed the texts; they read every word.

While chatting about other people's academic qualifications I suppose I should disclose my own: scraped through a bachelor of commerce, pass level.

Had to repeat several subjects, and the last pass I got, for international economics, was conceded. I couldn't see the point of economics until long after I left uni.

If by now I do know a bit about the topic, it's thanks mainly to long telephone tutorials from the aforementioned and their predecessors.

As citizens we should find it reassuring that our politicians are being advised by such smart people.

For the most part they're more intelligent (and better qualified) than their political masters – and than the politically ambitious young punks in the minister's office who stand between them and the boss.

We'd be better governed if more of the people in ministers' offices came from the department, if there was a less adversarial relationship between the office and the department, and if ministers and their private advisers were more conscious of their need for policy advice from the more expert.

After Scott Morrison's major speech about "the taxed and the taxed-not" I stopped myself saying it was clear Treasury hadn't written it because of all the bad grammar in it.

The broader point is that, although the nation may not be doing as well as we should be in increasing the human capital of the workforce, there's no doubt our workforce is getting better qualified.

Over just the 10 years to 2015, the proportion of our population aged 20 to 64 with a bachelor degree or above rose by 7.5 percentage points to 29.3 per cent.

This would include a lot of our brighter young people getting double degrees – the benefits of which I'm yet to be persuaded of. (Whether too many of our workers have actually become overqualified is a worry for another day.)

So rest assured, the economic bureaucracy is at least keeping up with the trend to better qualified workers, and probably exceeding it. Of course, people with doctorates are popping up throughout the workforce, not just the bureaucracy.

Most of the Reserve's PhDs are home grown. As you may remember from Peter Martin's fascinating biography of its new leadership, Lowe joined straight from school, meaning the Reserve funded his education all the way from undergrad university medal to doctorate from MIT in Cambridge, Massachusetts.

Since the Reserve earns a fortune each year by printing bank notes for less than 10¢ a pop and selling them to the banks at face value (only most of which it eventually passes on to the government), it's well able to afford to ensure its troops are well educated.

It's harder for Treasury, whose bright young things compete against the rest of the public service for a limited number of scholarships (one of which was endowed by the will of a former Treasury secretary).

You could be forgiven for wondering whether having our top econocrats so well-qualified academically is such a wonderful idea. Fortunately, there's a big difference between an econocrat with a PhD and a university lecturer with one.

Too many trainee academic economists are just learning to do mathematical tricks that will impress their peers. A post-grad from the bureaucracy knows they're learning how to prescribe better economic policy.
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Saturday, October 1, 2016

Breaking news: classical Athens had an economy

Did you know that classical Athens didn't have an economy? If you find that hard to believe, you should - because it's not possible.

But if you read the many hundreds of books written about Athens in the classical period, you could be forgiven for imagining that all those philosophers, poets, artists, politicians and generals existed in a world where the mundanities of making a living and raising a family didn't exist.

This may be because the authors of those books thought that, beside the glories of Athens' literature, art, architecture and history, mere economics wasn't worth mentioning. Soo boring, darling.

Or it may be that, in the minds of the authors of earlier centuries - maybe even in the minds of the Athenians themselves - an association with "trade" carried a social stigma. Like using the lavatory, it was a necessary evil not to be mentioned in polite society.

But when Peter Acton, who studied classics at Oxford but ended up as a management consultant, finally got the chance, he decided to search out whatever information he could find to set the record straight and complete the picture of Athenian life.

Athens' classical period ran from the defeat of the second Persian invasion of Greece under Xerxes to when Athens and the rest of Greece came under the control of Alexander the Great. So, the fifth and fourth centuries BCE.

Whatever they did to keep body and soul together that long ago must have been small and primitive, right?

Well, no. Acton found Athens at the time had a large and thriving manufacturing sector, defined broadly to include both mining and construction.

He set out his discoveries in the book Poiesis: Manufacturing in Classical Athens, which I'll summarise. "Poiesis" comes from the same Greek root as "poetry", but means "to make".

It seems the Athenians had a lot of manufactured items in their homes. They were at the stage of economic development where the more accoutrements you could acquire, the better off you were (whereas we're closer to satiation with goods and prefer acquiring experiences).

"Athenian Man was as likely as not to have made many of the products used in his own home and probably depended for a good part of his sustenance on manufacturing for sale," Acton says.

"However rich he was, his wives and daughters would make their own clothes, working alongside some of their slaves and perhaps supervising others in the household's workshop.

"Every time he went outside, he would be surrounded by evidence of production: the smells and the smoke of smithies and pottery furnaces, the clack of looms, the hammering of carpenters and sculptors, carts rattling through the streets full of stone or wood or bales of fine cloth or jars of imported oils."

It seems likely that more than half the city's residents would have spent at least some of their time manufacturing products for sale or home consumption, Acton estimates.

This would involve almost all the slaves, of course, either helping with household production or working in a gang for one owner.

"A reasonable estimate is that around a quarter of the free population of all status levels, men and women, worked at making things," he says.

Manufacturing activity ranged in size. "It is a common mistake to see manufacturing as having undergone a steady progression from self-sufficiency based on home crafts to mechanised mass production.

"In reality, individual craftsmen, small workshops, co-operative production arrangements and large factories have coexisted over millennia in various societies, not least in classical Athens."

Although written accounts of economic life are sparse, archaeological finds are a different matter. Material evidence gives us clues about the occupations followed.

Wood, for instance, suggests foresters, sawyers, carpenters, furniture makers and boat builders. Stone suggests quarrymen, stonemasons, sculptors, mosaicists and haulers.

Metals imply miners, blacksmiths, armourers, silversmiths, goldsmiths and coiners. Clay implies potters and tilers; hides say tanners and cobblers; reeds say rope and basket makers; herbs say healers and perfumers, and wool says fullers, dyers and weavers.

Manufacturing, Acton contends, was the great leveller. Whereas agriculture was real capitalism, contributing to social inequality, trade and industry helped to level income and status.

"The social mobility, employment opportunities and relatively even distribution of wealth that accompanied the rise of commerce helped Athens to avoid the revolutions that the Peleponnese suffered regularly."

By Acton's estimate, the classical Athenians enjoyed a high standard of living - not just compared with other people at the time, but even compared with any other society until recently.

Economic growth in Greece was up to 0.9 per cent a year, twice as fast as in England and Holland before the Industrial Revolution.

By classical times the basic daily wage was about six times that required for subsistence, and half Athens' population lived a life that was better than the typical Briton's in the 18th century.

Conspicuous consumption became increasingly common in the fourth century BCE. "Some couches and tables were highly ornate and inlaid with gold or silver.

"Men and women wore jewellery of outstanding craftsmanship and decorative ceramics or silverware for festivals might take several years of work."

Health, as measured by bone density, increased rapidly, even though urbanisation tends to have the opposite effect.

Houses, though not luxurious, were large and comfortable, typically with roof space larger than the median single detached house in the United States in 1997. The extra space accommodated more furniture and possessions.

Athens engaged in much trade. Massive imports of grain allowed her farmers to pursue their comparative advantage, producing olive oil and wine for export.

They also imported luxury items such as fine cloth, spices, dyestuffs and precious metals, often for further processing in Athens.

But it was rich in raw materials, including marble, limestone, clay and silver.

Sounds like Athenians then were doing better in relative terms than many of them are today.
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Wednesday, September 28, 2016

Continued globalisation requires more 'inclusive' growth

Remember globalisation? It was big news some years back. Now, however, the leaders of the global economy worry that public opinion is turning against it, pressuring governments to reverse it.

Globalisation is the process by which the barriers separating nations and their economies have been broken down by international co-operation and deregulation, but mainly by advances in technology.

We now have much more telecommunications, travel, trade, investment, money flows and migration between countries. News now travels around the world almost in real time.

Just how worried leaders have become about a reversal of this trend is revealed by a speech Christine Lagarde, managing director of the International Monetary Fund, gave in Canada this month.

She began by asserting the benefits of the process. The ability of countries to rise above narrow self-interest over the 70 years since World War II has brought unprecedented economic progress, she argues.

"Conflicts have diminished, diseases have been eradicated, poverty has been reduced and life expectancy has increased around the world."

The prime beneficiaries of economic integration and openness have been the developing countries, she says, a point the critics of globalisation rarely want to admit.

One of the most important developments was the entry of China, India and the former communist countries into the world trading system in the early 1990s.

According to the World Bank, international trade has helped reduce by half the proportion of the global population living in extreme poverty.

China, for instance, saw its rate of extreme poverty drop from 36 per cent at the end of the 1990s to 6 per cent in 2011.

In a single generation, Vietnam has moved from being one of the world's poorest nations to middle-income status, which has allowed increased investment in health and education.

But the rich economies have also benefited through higher living standards, caused by a more efficient allocation of capital between countries, improved productivity and lower prices for consumers.

"Research on the consumer benefits suggest trade has roughly doubled the real incomes for a typical [rich-country] household. And for the poorest households, trade has raised real incomes by more than 150 per cent," she says.

So what's the problem? Well, for a start, the opening up of world trade effectively doubled the size of the global workforce, putting downward pressure on the wages of lower-skilled workers in the advanced economies.

In the US, competition from low-wage countries has been one of the factors contributing to a decline in manufacturing employment, along with a wave of automation.

This decline has not been spread evenly across the economy, but concentrated in some states and towns that have faced deep and long-lasting effects from overseas competition, she says.

Similarly, the benefits from economic growth have not been spread evenly. In the major advanced economies, incomes for the top 10 per cent increased by 40 per cent in the past two decades, while growing only modestly at the bottom.

Then there is the globalisation of capital. Between 1980 and 2007 there was an eight-fold expansion in global trade, but a 25-fold increase in flows of financial capital.

This has greatly increased investment in developing countries. But much of the flows have been short-term and speculative, opening the door to financial contagion – sudden outflows sweeping from country to country – leading to concerns about the stability of financial systems.

"Growing inequality in wealth, income and opportunity in many countries has added to a groundswell of discontent, especially in the industrialised world – a growing sense among some citizens that they 'lack control', that the system is somehow against them," she says.

"Financial institutions are being seen as unaccountable to society. Tax systems allow multinational companies and wealthy individuals not to pay what many would consider a fair share."

Couldn't happen here, could it.

"And there is the challenge from uncontrolled migration flows, contributing to economic and cultural anxieties."

So what should we do? The goal should be to maintain the benefits from globalisation while sharing them more widely, she says.

Governments need to do more to encourage economic growth, but make it more inclusive, to "benefit workers across all economic sectors". (The need for growth to be "inclusive" is something leaders are talking about everywhere but here.)

We need to "step up direct support for lower-skilled workers" by greater public investment in education, retraining and by facilitating occupational and geographic mobility.

We need to "strengthen social safety nets" by providing appropriate unemployment insurance, health benefits and portable pensions. The US, for instance, could cushion labour market dislocations by increasing the federal minimum wage.

We need to "address the lack of vigorous competition in key areas. Think of major industries – from banking to pharmaceuticals to social media – where some advanced economies are facing large increases in market concentration."

Not here, of course.

"Boosting fairness also means clamping down on tax evasion and preventing the artificial shifting of business profits to low-tax locations," she says.

These measures can create a positive feedback loop: stronger, more inclusive growth reduces economic inequality and increases support for further reforms and openness.

But we must resist the temptation offered by "politicians seeking office by promising to 'get tough' with foreign trade partners through ... restrictions on trade".

We tried that in the 1930s as a solution to the Great Depression, and made things a lot worse for everyone.
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Monday, September 26, 2016

Global leaders change direction while we play games

It's strange the way Malcolm Turnbull and Scott Morrison keep shooting off overseas to compare notes with world economic heavies, but come back none the wiser.

Fortunately, the wonders of the internet allow us to read for ourselves what they're being told by the trumps at the Organisation for Economic Co-operation and Development and the International Monetary Fund.

It's clear those at the leading edge are getting increasingly worried about the outlook for the world economy and are urging a marked change of policy direction.

But while the trumps see a need for policy to swing back to the centre, our unruly Coalition is intent on drifting off to the far right.

Our preoccupation is with protecting the aspirations of the richest superannuants, changing the Racial Discrimination Act, delaying same-sex marriage, protecting negative gearing and blaming the budget deficit on greedy welfare recipients.

Back where they still care about the economy, the OECD is worried that "the world economy remains in a low-growth trap, with poor growth expectations depressing trade, investment, productivity and wages.

"This, in turn, leads to a further downward revision in growth expectations and subdued demand. Poor growth outcomes, combined with high inequality and stagnant incomes, are further complicating the political environment, making it more difficult to pursue policies that would support growth and promote inclusiveness," last week's OECD interim economic outlook said.

Here's where you're supposed to think of Donald Trump, Brexit and the resurrection of One Nation. That's really gonna help.

What's turning the prolonged period of weak global demand into a trap – a Catch 22 – is the adverse effect on the growth in supply from weak business investment spending, weak productivity improvement and the atrophying skills of the long-term jobless.

The OECD estimates that, for its 35 member countries as a whole, their "potential" growth rate per person – the average rate of growth in their capacity to produce goods and services – has halved to 1 per cent a year, relative to their average growth in potential during the two decades before the financial crisis.

The organisation is worried that growth in global trade is "exceptionally weak" and that "exceptionally low and negative interest rates" are distorting financial markets – including overblown share and housing prices – and creating risks of future crises.

So what should we do to escape the low-growth trap? Change the mix of policies.

We've relied too heavily on loose monetary policy, which won't be sufficient to get us out of trouble. Worse, it's "leading to growing financial distortions and risks".

Rather, we should move to "a stronger collective fiscal [budgetary] and structural [micro reform] policy response". Note the word "collective" – fiscal stimulus always works better when every country acts at much the same time.

The goal with fiscal and structural measures is to boost demand and raise the economy's productive capacity.

"All countries have room to restructure their spending and tax policies towards a more growth-friendly mix by increasing hard and soft infrastructure spending and using fiscal measures to support structural reforms," the organisation says.

The OECD and the IMF have argued that Australia has plenty of "fiscal space" to increase borrowing for productivity-enhancing infrastructure; space that's been increased by the very low interest rates payable on our existing and any further debt.

The latest OECD economic outlook continues: "Concrete instruments include greater spending on well-targeted active labour market programs and basic research, which should benefit both short-term demand, longer-term supply, and help to make growth more inclusive."

And, in the present environment of weak demand, supportive macro-economic policies would create a more favourable environment for the short-term effects of structural reforms, we're told.

Now get this: easing the fiscal stance through well-targeted growth-friendly measures is likely to reduce the debt-to-GDP ratio in the short term, we're told. How? By adding more to nominal GDP than it adds to public debt.

"Furthermore, provided that fiscal measures raise potential output, a temporary debt-financed expansion need not increase debt ratios in the longer term," the organisation concludes.

To be fair, both our retiring and our new Reserve Bank governor (who also go to all the international meetings) have told the government monetary policy has done its dash and we need to rely more on spending on infrastructure.

The question is how long it will take our politicians to realise that their survival in government is more likely if they improve our economic performance and improve their electoral appeal by returning to policies of the "sensible centre" and ensuring growth is more "inclusive" – as they say in Paris and Washington, but not Canberra.
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Saturday, September 24, 2016

The rules on how we conduct monetary policy

Something happened this week that occurs only about once a decade, an event that deserves much of the credit for our avoidance of a severe recession for 25 years and counting.

It was the announcement of a new agreement between the elected government, represented by the Treasurer, Scott Morrison, and the newly appointed governor of the Reserve Bank, Dr Philip Lowe, recorded in a "statement on the conduct of monetary policy".

The statement re-affirmed the government's willingness to allow the Reserve, our central bank, to set "monetary policy" - to manipulate the level of short-term and variable interest rates paid and charged in the economy, so as to influence the strength of demand - without reference to the wishes of the politicians.

The length of the period of continuous growth in the economy is measured from the end of June 1991, the last quarter of contraction during the severe recession of the early 1990s.

It's no coincidence that the era of central bank independence began just a few years later in 1993, first informally under the Keating government and then formally under the Howard government in 1996, at the time of the appointment of Ian Macfarlane as governor.

Handing control of interest rates from the pollies to the econocrats has been a huge success, though it's important to remember that, in the time since then, the economy contracted - got smaller - in the December quarter of 2000 and again in the December quarter of 2008, with unemployment rising significantly on both occasions.

That's why I always say it's been 25 years since our last severe recession. We've had two small recessions since then, though they were too short and shallow for anyone but economists to remember them.

But their very mildness is testimony to the success of the move to central-bank independence. The econocrats move interest rates up or down according to their best judgement on what's needed to keep the demand for goods and services as stable as possible.

The pollies were too inclined to let the approach of the next election influence whether rates should be going up or down.

Of course, another factor has contributed to the vastly improved management of our economy: all the "micro-economic reform" of the 1980s and '90s.

The floating of the dollar, the removal of import protection, the move to enterprise wage bargaining and myriad small acts of deregulation in particular industries have greatly increased the degree of competition within our economy, making it more flexible in its ability to cope with economic shocks and less inflation-prone.

So the managers of the macro economy have found it easier to keep the economy on an even keel, avoiding extremes in inflation or unemployment.

When we joined the rich-world fashion of making central banks independent, we adopted another new idea of making a target for the rate of inflation the main guide for decisions about changing interest rates.

While other countries set hard and fast inflation targets of zero to 2 per cent, we set a target that not only was higher - 2 to 3 per cent - but was also less hard and fast.

We were required to hit our target only "on average, over the cycle". So when you take the average of the inflation rate over a reasonable period, the result always has to be 2-point-something.

We were criticised for our target's fuzziness, but we've since won that argument. The others weren't able to achieve their "hard-edged" targets and had to modify them, whereas we've always achieved ours, even though we've been outside the range for 46 per cent of the time.

This week, in his regular testimony before a parliamentary committee - one of the conditions of accountability and transparency required in return for the Reserve's independence - Lowe argued that the target's flexibility meant there was no need to change it, even though it seems likely the world has entered a period of lower inflation.

This third version of the statement on the conduct of policy contained two minor changes.  "On average, over the cycle" became "on average, over time".

The two words mean much the same thing. How long is "over time"?  As the statement says, it means "the medium term". How long's that? We're not told, but I'd put it somewhere between five and 15 years.

The second change made clearer the link between monetary policy and the stability of the financial system.

In setting interest rates, the Reserve will take account of the need to ensure people can always borrow, lend and make payments, and ensure the failure of a particular financial institution doesn't cause any doubt about the stability of the others.

When the inflation target was first adopted, some people feared it meant the Reserve wouldn't worry about unemployment or growth. More than 20 years later, we know those fears were unwarranted.

The Reserve sees low and stable inflation as a precondition for achieving strong growth in employment and income.

And so it's proved. The Reserve has shown that the best way to keep unemployment low is to keep recessions as shallow and far apart as possible.

The flexibility built into the formulation of the inflation target is designed to keep inflation in perspective, absolving the Reserve of the obligation to crunch the economy whenever inflation pops its head above 3 per cent, or madly rev up the economy whenever inflation drops below 2 per cent.

Monetary policy is the primary "arm of policy" used to achieve "internal balance" - price stability and full employment or, more simply, low inflation and low unemployment.

It does need backup, however, from the other arm, "fiscal policy" - the manipulation of government spending and taxation in the budget - whose primary goal is "fiscal sustainability" - making sure public debt doesn't get too high.

There's much more to the story, but that's enough for now.
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Wednesday, September 21, 2016

Brave minister wants us to think about road user charges

If you're searching for a politician with courage, smarts and foresight, meet Paul Fletcher, Malcolm Turnbull's Urban Infrastructure Minister. He's so unlike your typical gutless pollie he reminds me of Paul Keating.

Fletcher gave a speech last month in which he raised issues from which most politicians would run a kilometre. He thinks heavy vehicles – trucks weighing more than 4.5 tonnes – should pay road-use charges that more accurately reflect the huge damage they do to our roads. That's brave.

But he thinks ordinary drivers should also be paying a road-user charge. That's not brave, it's outrageous.

Fletcher, however, has his own arguments to persuade us it's really quite sensible.

He says he's worried about how the federal government will be able to maintain its contribution to building and maintaining the nation's roads when the move to more efficient cars causes its revenue from fuel excise to fall away.

He reminds us that, whatever the price of petrol, it's almost 40¢ a litre higher than it needs to be, thanks to the federal government's fuel excise.

This means, of course, that how much tax you pay is partly a function of your vehicle's fuel efficiency. So someone driving a 12-year-old Holden Commodore pays 4.5¢ a kilometre, whereas someone in a six-year-old Renault Megane pays 3.5¢.

But get this: someone with a late-model Toyota Prius hybrid pays just 1.5¢ a kilometre and someone who's paid $125,000 for one of the new all-electric Teslas pays exactly … nothing.

See the problem? As we all do the right thing and move to more environmentally friendly driving, the government's excise revenue will be going down, not up.

Today, electric vehicles make up only about half a per cent of our vehicles, but projections put that up to 30 per cent within 20 years.

Then how will we pay for our roads?

Fletcher's answer is that we need to move to funding them more directly by a user charge – say, one based on the number of kilometres you drive.

He stresses this isn't an argument for motorists to pay more. They already pay a lot more than federal excise to drive their cars, including state rego fees and stamp duty.

Indeed, if you pull together all the taxes and charges we pay that are in any way associated with cars and trucks – including under GST and the fringe benefits tax – you can get to a total of about $30 billion a year, of which fuel excise accounts for only about a third.

This compares with total spending on building, maintaining and operating roads – federal, state and local – of about $25 billion a year.

So Fletcher's idea is to rationalise this mish-mash of taxes and charges and replace them with a road-user charge that would be much more visible.

But this is where he reminds me of Keating, who often used wrong but more appealing arguments to persuade us to accept needed but unpleasant measures.

Fletcher has picked up a long-standing piece of motoring organisation propaganda – that every cent of tax paid by motorists should go back into roads – and given it the status of a self-evident fiscal truth.

The truth is there's never been any link – legal or informal – between the taxes and charges on petrol and cars, and the amount governments spend on roads.

Nor should there be. Governments have to pay for 101 services we demand of them apart from roads. So they have to raise a lot of revenue, which they do by taxing a wide range of activities and things, not just one or two.

What they tax tends to be what we're used to them taxing, since we have such knee-jerk opposition to anything we can condemn as a "new tax".

The feds' spending on roads is equivalent to only about two-thirds of what they raise from fuel excise. So should excise receipts decline in the future, this will be a problem for the whole budget, not for road spending in particular.

Fletcher is right to think that user charges would be an improvement because their greater visibility would encourage us to be more economical in our use of roads.

That's particularly true of heavy vehicles, because it's they that do most of the damage to our roads. We don't want goods being moved interstate by road rather than rail because we're charging semi-trailers and B-doubles only a fraction of the cost of the damage they do.

But if the rest of us had to pay a user charge whose purpose was to cover all the remaining costs of roads and to replace all the other taxes and charges, that might be neater and more visible, but it would be a lost opportunity to help us reduce a different, fast-growing cost for city motorists: congestion.

The cost of congestion is the cost I impose on other motorists by driving my car at the same time they do.

And the way to reduce it – as well as the spending needed for new motorways and even public transport – is to replace some of the tax we pay with a user charge that varies by location, time of day and distance travelled.

As Fletcher says, there's a lot more thinking to be done about how we pay for roads.
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