Monday, July 24, 2017

Big business influence wanes as public rejects ‘bizonomics’

The collapse of the "neoliberal consensus" is as apparent in Oz as it is in Trump's America and Brexitting Britain, but our big-business people are taking a while to twig that their power to influence government policy has waned.
Their trouble is the way the era of micro-economic reform initiated by the Hawke-Keating government in the 1980s eventually degenerated into "bizonomics" – the pseudo-economic belief that what's good for big business is good for the economy.
Part of this is the belief that when you privatise a government-owned business, or outsource the delivery of government services to for-profit providers – when you move economic assets and activity from the "public" column to the "private" column – you've self-evidently raised economic efficiency and wellbeing.
Provoking an engrossing debate between economists, Dr Mike Keating, a top economic adviser in the (no relation) Keating era, used a post and a rejoinder on John Menadue's blogsite to claim the early reformers believed that who owned a business wasn't as important as whether privatising it would make its industry more competitive or less.
True, Mike. Trouble is, the advisers and ministers who followed the Keating² era weren't so discerning, nor so scrupulous.
In those days, the goal of making industries more "competitive" meant turning up the competition from imports, or removing government regulation designed to inhibited competition between local players.
These days, following the degeneration to bizonomics, making industry more competitive means granting concessions to make chief executives' lives easier.
I remember when part of the Keatings' motive for dismantling protection against imports was to cure Australia's lazy business people of their predilection for running to Canberra for help whenever times got tough.
No more rent-seeking, was the cry. But the degeneration from economics to bizonomics amounted to wholesale rent-seeking by business. Is productivity improvement weak? Obviously, that's the government's fault for not pressing on with economic reform.
What reform? Cutting tax on companies and high income-earners and increasing the tax on consumers. Shifting the legislative power balance between employers and their workers even further in favour of employers.
Sorry, but as has been well demonstrated by Malcolm Turnbull's refusal to increase the goods and services tax, his inability to cut the company tax rate for big business, and the public's overwhelming disapproval of the Fair Work Commission's decision to cut Sunday penalty rates (complete with the Coalition's attempt to deny paternity of the bastard child), those days are ending.
These days, it's not just leftie troublemakers who doubt that benefits going direct to big business will trickle down to the rest of us, it's every punter in the street.
Another element of bizonomics is governments in many anglophone countries maintaining the facade, but not the substance, of business regulation.
They tell the public it's protected by laws governing treatment of consumers, employees, shareholders, taxpayers and others, but then rob the regulatory agencies – in our case the ACCC, Fair Work Ombudsman, ASIC and the Tax Office – of the resources they need to adequately enforce the laws they administer.
In this game of nudging and winking, it didn't take long for business to realise that, its chances of apprehension being tiny, obeying any law it found standing in the way of higher profits was now optional.
And that, though they could never admit it, this was the way governments of both colours secretly wanted it to be.
This is what explains the plethora of business law-breaking being uncovered by Fairfax's Adele Ferguson and other investigative journalists. What's notable is the way the business lobby groups have failed to condemn corporate lawbreaking.
A few decades of bizonomics have left our big business chiefs with the assurance they possess a God-given right to have their every demand accommodated by governments.
Sorry guys, apart from the lack of evidence that allowing you to aggrandise yourselves leaves the rest of us better off, democracies don't work that way.
In the end, power derives from voting punters, not corporations making generous donations to party coffers. The donations work only as long as the pollies can use them to amass enough votes for a government trying to swing it for biz business.
That's what's no longer happening, and the sooner you wake up to it, the sooner you can move to profit-making Plan B: find it within your business, not by lobbying Canberra.
The pollies have already got the punters' message. That's why the Coalition is becoming less willing to do your bidding and Labor has realised getting tough with business has more upside than down.
If this means you stop donating to either side, so much the better.

Saturday, July 22, 2017

Occupations are changing as the jobs total grows

Have you heard that most of the jobs being created in the economy these days are part-time? No? Good. Yes, you have? Sorry, your info's out of date.

It was true last year, but not this year. As this week's figures for the labour force from the Australian Bureau of Statistics showed, of the 176,000 additional jobs created in the first six months of this year, 93 per cent were full-time.

That, BTW, was an exceptionally rapid annualised rate of growth of 2.9 per cent. Doesn't sound like the economy's dead yet.

Admittedly, it was a very different story last year. The calendar year saw growth in total employment of just 100,000 jobs – a very weak 0.8 per cent – of which 135 per cent were part-time.

Huh? Think about it: there must have been a fall of 35,000 in the number of full-time jobs. And there was.

It was a particularly bad year, and with all the happy scare stories about the rise of the "gig economy" it was enough to convince a lot of education-leavers that their chances of ever getting a decent, full-time job were low.

Moral: don't count your nightmares before they've hatched.

Dr David Gruen, a deputy secretary in the Department of Prime Minister and Cabinet, noted in a speech this week that "the displacement of jobs by technology ... is one of the developments that is leading to a sense of unease among many in the community."

People may fear that their own job may be taken over by a machine, or worry there'll be insufficient meaningful jobs for their kids.

Maybe, maybe not. Before we leap to cataclysmic conclusions, Gruen reminds us that fears of technological advances rendering many jobs obsolete is an idea with a long pedigree – back to the Luddites going around smashing machines in the early 1800s.

In the 200 years since then, employers have never ceased seeking out the newest and best labour-saving technology, but so far this has failed to cause mass unemployment.

Coming to today, Gruen says there's little sign of a quickening in the rate of change in occupations that might signal big, new technology-driven changes in the labour market. Nor is there any sign of the rapid improvement in the productivity of labour that you'd expect to see if there was widespread replacement of workers with machines.

But what's been clear for some time, he says, is that jobs across the economy are not equally susceptible to being displaced by technology and automation.

"Routine or predictable tasks are more susceptible to displacement than non-routine tasks. This observation applies to both manual and cognitive tasks – whether manual or cognitive, routine tasks are easier to automate than non-routine ones."

Dr Alex Heath, of the Reserve Bank, has used the stats bureau's figures on workers by occupation to see how these distinctions have affected our workforce over the 30 years to 2016.

She finds no sign of a recent quickening in the pace of change in occupations, but she certainly does find such change over the 30 years since 1986.

The proportion of routine manual jobs (such as labourers and machinery operators) in total employment has fallen from 40 per cent to 30 per cent, while the proportion of routine cognitive jobs (such as salespeople and clerical workers) has fallen from 27 per cent to 24 per cent.

In contrast, the number of non-routine manual jobs (such as nurses and hospitality workers) has risen from 6 per cent to 11 per cent, with non-routine cognitive jobs (such as management and professional occupations) rising from 27 per cent to 36 per cent.

This means routine jobs' total share of the workforce fell by 14 percentage points, whereas non-routine jobs' share rose by 14 points.

The share of routine and non-routine manual jobs fell by 5 percentage points, meaning the share of all cognitive jobs rose by the same.

(If you're wondering, over that 30-year period, total employment grew by almost 5 million jobs – an increase of more than 70 per cent – with the extra jobs spread about equally between part-time and full-time.)

Gruen says we should expect these trends to continue. But he makes a point first made by American economist Daron Acemoglu, that there's not one big trend going on in the workplace, but two.

The one that gets all the headlines is automation – jobs being taken over by machines. But the trend that gets much less notice – thus contributing to the public's excessive anxiety – is the continuous creation of new, useful, complex (that is, non-routine) jobs.

We've seen that, for at least the past 30 years in Oz, both trends have been at work. One displacing jobs, the other creating them. And so far, their effect on the composition of jobs has been roughly equal, and hasn't prevented continued growth in the total number of jobs.

Of course, it remains possible that the digital revolution will cause an acceleration in trend of displacement of jobs by machines, thus overwhelming the creation of new, complex jobs.

But another American economist, David Autor, has explained that certain tasks are particularly hard to automate.

These are tasks "that people understand tacitly and accomplish effortlessly, but for which neither computer programmers nor anyone else can enunciate the explicit 'rules' or procedures ... [The] tasks that have proved most vexing to automate are those demanding flexibility, judgment and common sense – skills that we understand only tacitly".

Of course, it's possible that "machine learning" may overcome these problems, but there's another constraint on machines taking all our jobs away to remember: the need for interpersonal skills in a growing number of jobs, plus our human preference for being served or helped by humans, not robots.

Don't discount the human factor.

Friday, July 21, 2017


Australian Conference of Economists, Special Session, Sydney, Friday, July 21, 2017

The notion that ethics has anything to do with economics, that economists should subject their professional behaviour to some sort of ethical standard, is such a foreign one that we have a long way to go in just accepting the idea, let alone finding a way to put it into practice.

I don’t pretend to have all the answers, though I do have some strong opinions. And it probably won’t surprise you to know that, as a journalist, my work is subject to a clear and detailed ethical code, set by the journalists’ union, accessible on its website, endorsed by many media companies and updated as necessary. Journos don’t delude themselves that they merely explore a “positive” science, without resort to “normative” considerations.

There are two ways to think of the economists’ role. One is that it’s to provide the community with dispassionate advice about the best ways for it to go about achieving its economic objectives. The other is to explain/convince/assert to the community what its economic objectives should be, and hence the policies that must be followed to achieve them.

The term “economic rationalism” was in use long before the sociologist Michael Pusey took credit for coining it, but the growing influence of this Treasury-style thinking during the term of the Hawke-Keating government – the Australian equivalent of what people overseas call neoliberalism – was very much in this second, more missionary approach of telling governments exactly what policies they should and should not be following.

In my own career as an economic commentator it wasn’t until around the turn of the century that I found my own ethical anchor in the slogan, Serve the Reader. Although I haven’t stopped supporting those policies I consider to be better than others, I have switched my mission from trying to persuade readers of the rightness of the economic rationalist cause, to acting as a kind of theatre critic to economics, elucidating the strengths and weaknesses of economic theories and policies for the benefit of my readers. When I see someone – politician, vested interest, economist – using economics to pull the wool over my readers’ eyes, I’m on their case.

Which brings me to the main point I want to make and the main reason I was so easily enticed to be on this panel today. If ever there was a part of the economics profession where behaviour seems most in need of ethical standards it must surely be the relatively new industry of “economic consultancy” – economists who make their living providing economic analysis – usually in the form of econometric modelling – to paying customers, usually industry groups lobbying the government for or against some policy proposal, but occasionally the government itself.

Sometimes I think economic consulting is little more than the up-market end of the public relations industry. I suppose there must be occasions where these consultants provide their clients with analysis purely for their use internally but, for the most part, the analysis is sought so that it can be made public, complete with oversimplified press release, in order to influence public opinion and put pressure on the government.

Often the attempt is made to give this analysis greater authority and credibility by calling it “independent” analysis. I can’t remember ever hearing the economists who produced it contradicting this claim, but nor can I imagine how anyone who believes in the power of market forces could believe that analysis that’s the product of a commercial transaction – where the producer is hoping the paying customer is pleased with what they paid for and will make repeat orders – is in any way “independent”. Is it the behaviour of an independent authority to keep its mouth tightly buttoned while your client, and the politicians who agree with his cause, repeatedly misrepresent your findings to the public?

This lack of independence is just as much the case when Treasury or some other department is commissioning analysis on behalf of the government. Sometimes the government may be genuinely uncertain and in need of external advice, but it’s far more likely it’s after “modelling” intended to help it persuade the public and the Senate that the policy it has determined to introduce should be accepted. In such transactions, Treasury knows what policies it favours, it knows what the government wants to be told, and it has a fair idea which consultants will be more amenable to giving it and its political masters the advice they’re hoping for. Forum shopping is a vice not limited to lawyers. Why do you think successive governments have refused to allow the Productivity Commission to analyse the costs and benefits of the so-called free trade agreements they make? They know the trouble with the PC is that it really does consider itself independent.

You don’t need to be a modeller to know how easy it is for the modeller to get the results desired by the choice of model used and by tweaking the variables. And yet the results are so often presented to the public as though they are God’s immutable truth. There’s no accompanying acknowledgement of the chosen model’s strengths and weaknesses, no admission of the key variables that are driving the models results, no sensitivity analysis, no admission that the model is a combination of both empirically measured variables and mere economic theories about how the variables combine to produce the model’s much touted results. No admission that exogenous variables for the future are set quite subjectively. No admission that many economists would disagree with the particular theories underlying the model you used.

Sometimes cannier modelers seek to insure themselves against criticisms such as these by burying in the very fine print of their reports jargon-ridden acknowledgements of some of them. But they stay mute when their results are presented and debated in a way that makes clear these insurance clauses haven’t been read by the very people who should have read them, as it was always intended they not be. This is ethical behaviour? Caveat emptor makes it all OK?

But I suspect there’s a related, less commercially driven reason why the use of economic modelling in the public policy debate is more about bamboozling non-economists than enlightening them. The other explanation is that, consciously or unconsciously, economists seek to avoid the Wizard of Oz Moment, when we see behind the curtain and realise the powerful wizard is really just a little man shouting into a megaphone, using tricks to make out he knows a lot more than he actually does.

Consider just two examples. Although many economists bang on endlessly about the adverse incentive effects of high marginal tax rates, we purport to show the effects of major tax reform using a model that can represent income tax only as a flat-rate tax. Why? Because it has just a single, “representative” household. We use a model utterly inadequate to the task – because it’s the best we’ve got – and present the results as definitive without any up-front admission that we don’t have the tools to answer the question we’ve been asked.

Or, take the very common modelling practice of assuming a short-term Keynesian world and a long-term neoclassical world. We ask such a model to tell us the long-term economic cost of introducing the carbon pollution reduction scheme. It starts in equilibrium, introduces the disturbance of a CPRS, wobbles a bit, then starts on its inexorable journey back to long-term equilibrium. Then we announce to the punters that our modelling shows the scheme’s long-term cost in forgone economic growth is, fortunately, quite minor. Then we wonder why they don’t trust us.

They say forecasters have a lot to be modest about. I’d add they have a lot to be more ethical about.


Wednesday, July 19, 2017

The era of neoliberalism is ending and reversing

If there's some trend in the world that we don't much like but has been happening for ages, there's a human tendency to assume it will keep on forever and just get worse. Occasionally, however, this moment signals it won't be long before it starts going away.

I'm a great believer in the pendulum theory of history: trends in human activity go on and on until they reach an unacceptable extreme, and then one day they turn and start going back the way they came.

That's certainly the way fashions in economics and government policy work. Consider the story since the end of World War II, using Britain as our guide.

There was a great reforming spirit after the war, and much that needed fixing. The economy wasn't working well and ordinary people – who'd done their duty so selflessly during the war – weren't getting a fair share of the economic rewards.

So the Brits set about installing the welfare state – comprehensive social security payments and a national health service in which most doctors became government employees – and "nationalising" many troublesome but important industries.

This new trend of nationalisation was copied in other countries including, to an extent, Oz.

But as the years rolled by it became clear that Britain's economy wasn't working well. Eventually, a new Boudica rose up, name of Maggie Thatcher, to set things right.

The problem was obvious: too much of the economy owned and run by the government and all those civil servants. Too many rules and regulations. The economy was inflexible and unresponsive. The unions had too much power and were abusing it, always on strike until they got their way.

The answer was to "privatise" most of the nationalised industries and get the unions back in their box.

We need to unshackle the power of the market, with its much greater ability to respond to changing times, greater desire to satisfy customers' needs and motivation to root out inefficiency.

This new trend of privatisation and deregulation – also pushed by Ronald Reagan in the US – has been copied in many developed economies, not least here.

By the early 1980s our economy wasn't working all that well. In a world of floating currencies, we were still trying to fix our exchange rate, battling speculators who always won.

Our banks were a joke, never able to lend enough for a home loan, so you went to a building society or they fitted you up with an expensive second mortgage from their finance company.

We'd been trying to cut ourselves off from the world with high barriers against imports, but been left with an economy that was highly inflation-prone, with much higher unemployment to boot.

Paul Keating and Bob Hawke set about modernising the economy, opening it up to a rapidly globalising world. They didn't ape Thatcher so much as start listening to the advice Treasury had been giving governments for years.

You've detected history's pendulum at work, I trust. Look at it over the decades and you see the fashion in management of the economy swinging from one extreme to the other.

Why does it swing so far? Because the truth – the happy medium – is somewhere in the middle but, because it's some combination of market forces and government management, is devilishly hard to find.

Much easier and more satisfying to champion one extreme or the other.

Why bring this up now? Because, if you hadn't noticed, this particular pendulum has just started swinging back.

As no less an authority than The Economist magazine has judged, the "neoliberal consensus" has collapsed.

For almost 40 years in the English-speaking economies, both sides of politics have accepted that businesses and individuals should be allowed to go about their affairs with as little restriction as possible.

But now both sides are stepping back from that attitude, doing so under pressure from voters growing increasingly unhappy about the state of the economy – in Oz, low wage growth, high energy costs, a seeming epidemic of business lawlessness and a lengthening list of government outsourcing stuff-ups – and the special treatment accorded to business.

You can see it overseas in the electoral popularity of Bernie Sanders and Jeremy Corbyn, and the anti-establishment revolts in the Brexit vote and the election of Donald Trump.

It didn't do her any good, but you see it in Theresa May's Conservative Party election manifesto: "We do not believe in untrammelled free markets. We reject the cult of selfish individualism. We abhor social division, injustice, unfairness and inequality."

Here, you see it in Malcolm Turnbull's reaction to the failed reform of the national electricity market, with his willingness to impose export restrictions on gas companies, buy Snowy Mountains hydro back from the states and contemplate federal construction of new coal-fired power stations.

You see it in Bill Shorten's policy of curbing negative gearing and the capital gains tax discount, his opposition to cuts in the company tax rate and willingness to legislate to restore and protect weekend penalty rates.

I reckon there's a lot more government assertiveness to come. You don't fancy a lifetime of precarious employment in the "gig economy" for yourself or your kids?

Don't worry, before long governments will legislate to protect employees rights at work – just as they used to in the old days.

Monday, July 17, 2017

Worsening school performance is everyone’s business

Amid all the uncertainty about where we'll be left by the many pressures bearing on us and our economy – climate change and digital disruption, for starters – there's one truth we can cling to: the more we enhance our natural capital and our human capital, the better placed we're likely to be.

Unfortunately, seeing the sense of this is a lot easier than ensuring it happens.

On natural capital – the preservation of species and physical resources, and the healthy functioning of the ecosystem – we've got one whole side of politics still struggling to get its climate-change deniers back in their box.

Even on human capital – the acquisition of knowledge and know-how – there's plenty of conflict, ranging from economic rationalists who think constraining the growth in government spending and taxation more important than accruing human capital, to people in the education system who think the adequacy of their present performance is no one's business but their own.

On the one hand, we've got the smaller-government brigade saying the performance of, say, school education can be fixed without spending an extra dollar.

On the other, we have teachers – some of them, anyway – arguing there's no problem that having taxpayers hand over a lot more bucks wouldn't fix.

How would the extra money be spent? That's for teachers and education departments to decide, and for everyone who isn't a teacher – and therefore knows nothing about schools – to mind their own beeswax.

The smaller-government brigade closes its eyes to the need to improve the performance of our schools and to the significant economic and social gains we stand to make by improving that performance.

The size of these gains can be demonstrated using the Fairfax-Lateral Economics index of Australia's wellbeing, compiled by Dr Nicholas Gruen and published every quarter upon the release of the national accounts.

The index overcomes the limitations of gross domestic product as a measure of economic progress by starting with the most appropriate modification of GDP – real net national disposable income – and adding to it estimates of the value of human capital, natural capital, the effects of distributional inequality, environmental amenity, health and employment-related satisfaction.

The measure of human capital takes account of early childhood risk, school performance, tertiary education, innovation (multi-factor productivity) and skills atrophy from long-term unemployment.

The indicator used to measure our progress in school education is the change in our score from the regular testing of our 15-year-olds' reading ability under the OECD's Program for International Student Assessment.

Our kids' reading score has fallen almost continually since 2000, from 528 to 503, or 4.7 per cent. By comparison, Canada's score has declined only marginally over the period, from 534 to 527.

The index's estimates suggest that, were we able to lift our score only to Canada's level, this would increase the value of our human capital by almost $17 billion a year.

That's equivalent to about 1 per cent of GDP – far more than promised by almost any other proposed economic reform, including cutting the company tax rate.

Putting it another way, had our 15-year-olds' performance not deteriorated since 2003, the estimated value of the human capital – know-how – in the heads of this year's 15-year-olds would be $17 billion greater than it is.

Our kids' academic performance in each of the areas measured in the PISA tests – reading, maths and science – has been deteriorating, though at differing rates. This is worse than the picture shown by successive NAPLAN test results, summarised as flat to down.

This is why teaching is a problem too important to be left to teachers. The more so because some teachers – a minority, I trust – have become hyper-defensive, refusing to acknowledge there's a problem, telling themselves that, if there is a problem, it's everybody's fault bar their profession's, and branding any non-teacher who dares to offer an opinion a "teacher-basher".

Julia Gillard's attempt to use the measurement (via NAPLAN) and publication (via the My School website) of students' and schools' academic performance to raise standards by fostering competition between schools was misguided – pseudo-economic – and has failed.

But too much of the resistance and criticism of NAPLAN and My School arise from some teachers' desire to continue avoiding public accountability for the quality of their work.

It should go unmeasured (because fault can be found with every form of measurement humans have tried) and, to the extent that performance information exists, it should remain confidential to insiders, because outsiders lack the expertise to interpret it correctly.

Sorry guys, but more money comes at the price of greater accountability to, and scrutiny by, the mug taxpayers who cough it up.

Saturday, July 15, 2017

Why global trade growth has slowed

One thing you can be sure of is that international trade grows much faster than the world economy. It's the classic proof of growing globalisation, and it's been happening for ages. Except that it seems to have stopped.

For two decades from the mid-1980s, world trade – measured as exports plus imports – grew at more than double the rate of growth in gross world product.

Between 1986 and 2007, the volume of trade grew at an average annual rate of 3.4 per cent of world real gross domestic product, meaning it went from being equivalent to almost 30 per cent of gross world product to almost 60 per cent.

But then it dipped sharply in 2008 and 2009, thanks to the fall-off in trade after the global financial crisis and the onset of the Great Recession.

It bounced back in 2010 but, since 2011, its growth has been only a little faster than world production of goods and services.

In the decades before 1986, the volume of trade grew faster than production, but at much slower rates than in the two decades that followed. That's how we know to date the modern era of globalisation – the breaking down of economic barriers between national economies – from the mid-80s.

So, why has trade growth slowed so noticeably, and is this merely cyclical (temporary) or is it structural (lasting)?

According to a study by the Organisation for Economic Co-operation and Development, a fair bit of both.

The study estimates that about 40 per cent of the slowdown between 2011 and 2015, as compared with the period from 1991 to 2007, is explained by the weak growth of demand in the global economy.

In particular, the crisis saw a sharp fall-off in businesses' investment spending on new physical capital – which happens to be import-intensive – but it hasn't recovered all that much in the years since then.

But that leaves roughly 60 per cent of the slowdown explained by deeper, more structural forces, ones that won't just go away if we wait a few more years.

Part of the explanation is that, in the two decades before the crisis, certain factors contributed to making trade growth exceptionally strong, but these factors have now lost their force.

The biggest cause of this exceptional growth in trade was various measures to reduce tariff and non-tariff restrictions on trade.

In 1989, and partly at Australia's instigation, the Asia Pacific Economic Co-operation partnership between 21 countries was established to promote free trade.

The European Union moved to a single market in goods, services, labour and capital in 1992, increasing trade between its members. Because Europe consists of a number of separate countries, it's highly (international) "trade intensive" in a way that America – composed of states rather than countries – or even Australia, isn't.

In 1994, the "Uruguay round" of multilateral negotiations – the biggest of the many rounds of reductions in protection organised by the General Agreement on Tariffs and Trade since World War II – was reached.

This round extended membership of the GATT from the developed countries to about 150 developing countries – thus doing much to increase trade between the two groups. It also reached trade agreements covering new areas such as textiles, agriculture, services and intellectual property.

And, for good measure, the round turned the GATT into the World Trade Organisation.

The North American Free Trade Agreement between the US, Canada and Mexico began in January 1994.

And also hugely important to the growth of trade, China – now the world's second-largest trading nation – joined the WTO, cutting much of its protection as a condition of entry.

A second factor promoting the growth of trade in the two decades before the crisis was the widespread development of "global value chains" – value as in "value-added" – under which manufactured goods (cars, for instance) are assembled in one country using parts from many countries.

As trade liberalisation measures slowed in about 2000, continued growth in trade was supported by China's rapid emergence into the world economy.

By the second half of the noughties, however, these structural sources of growth had waned.

In this century, the WTO's Doha round of multilateral negotiations, launched in November 2001, has ground to a halt. According to the study, this halt in liberalisation explains about a quarter of the slowdown in the growth of trade between 2011 and 2015, compared with 1991 to 2007.

Many bilateral and regional trade agreements have been signed since then, but the only really significant agreement, the Trans Pacific Partnership, signed in February 2016, has since been scuttled by US President Donald Trump.

Add to this, "creeping protectionism from myriad small measures" in various countries, which has put trade liberalisation into reverse.

The spread of global value chains seems to have reached its limit, even declined.

Meanwhile, China's period of export-led growth has ended, with its authorities now aiming for growth led by domestic demand.

So what happens next, and what should be done?

The study says some cyclical recovery in the growth of trade is likely but, without further trade liberalisation, a return to the glory days seems unlikely.

"Trade", it reminds us, "and the related expansion of global value chains, boosts [economic] growth through increased productivity, by improving resource allocation, increasing scale and specialisation, encouraging innovation, facilitating knowledge transfer, fostering the expansion of more productive firms and the exit of the least productive ones."

All true. But, as the study acknowledges, the benefits of increased trade aren't spread evenly between or within the countries involved.

As a consequence of this – and the politicians' failure to ensure the losers from globalisation were compensated by the winners – the electorate in many rich countries is "increasingly polarised into pro- and anti-globalisation groups".

We have a lot of ground to make up before much enthusiasm for further globalisation returns.

Wednesday, July 12, 2017

Where to next with The Great Gonski

I was in Moscow, recovering from a 12-day train trip from Beijing via Mongolia and Siberia, when I heard that Malcolm Turnbull's Gonski 2.0 shift to needs-based funding of schools had been passed by the Senate in the early hours of the morning.

So forgive me for being late to the party, but I can't let this key economic and social reform – surely one of the Coalition government's greatest achievements – go without acknowledgement and explanation.

The new act seeks to allocate government funding to schools, public and private, on a rational basis – the needs of individual students – rather than on what you got last year and what special deals you've done with politicians.

It seeks to phase out the decades-long sectarian basis for funding, where how much government assistance a student gets varies with the denomination of the church – or religion, or secular state – running their school.

Remarkably, Turnbull's success was achieved against the implacable opposition of the very people who spent the past four years professing to want "the full Gonski" – Labor, the teachers' union and, in the end, the Greens.

I'm still deciding whether Labor and the Greens were subservient to the union, or the union was staying loyal to Labor in hope of future largesse.

That Turnbull and his capable Education Minister, Simon Birmingham, were nevertheless able to win sufficient support from the minor parties, tells us the Senate isn't as unworkable as many suppose.

And whereas efforts to win minor-party support usually involve watering down the proposed measures, this time they significantly strengthened them – paradoxically, thanks largely to the efforts of Greens Senator Sarah Hanson-Young.

These improvements included a new independent body to review the accuracy of the various measures of student disadvantage (as recommended by David Gonski's review, but rejected in Labor's "full Gonski") and shortening the phase-in from 10 years to six (so that all schools reach their proper funding levels long before they would have under the "full Gonski").

Because the act will unwind the special deals the previous Labor government did with particular state- and private-school systems, moving federal funding on to a uniform basis across the country, it produces both winners and losers among the states and religious school systems. Be sure we'll be hearing more special pleading from them.

To acknowledge the Turnbull government's achievement isn't to suggest its job is done.

For a start, although the amended act includes a mechanism that would claw back federal funding to the states should they fail to maintain their own funding, the states need to realign their own funding of public and private schools to fit with the new formula under which, by 2023, the feds will fund 20 per cent of the assessed needs of government schools and 80 per cent of the needs of private schools.

So the states should provide 80 per cent of the funding needed by their own schools and 20 per cent of that needed by their private schools. This will require increasing grants to some schools, but cutting them to others.

More importantly, ensuring public funding goes to schools on the basis of their students' needs is just the first step towards the ultimate objective of improving our schools' performance.

As we well know from the regular local NAPLAN and international PISA ratings of students' academic performance, our schools' performance hasn't improved, and in some respects has deteriorated from earlier years, while slipping back in comparison with other countries.

To me, however, the clearest evidence of our schools' poor performance is the shockingly high proportion of students – about a quarter – who leave school without an adequate education. That's a terrible failure rate.

Doing more to help our most disadvantaged students do better is almost certain to require more money. That's why basing our school spending on the needs of particular students is essential.

But it's just step one. If we could be certain the extra money going to needy students would be spent well without further intervention, our schools' performance wouldn't be as poor as it is.

No, the next step is to ensure the redirected money is spent as effectively as possible, on teaching techniques and interventions proven to be most effective.

There is, for example, a lot of evidence that "targeted teaching" – where teachers keep checking to ensure particular students have actually learnt what they've just been taught, and don't press on until they have – stops kids falling behind.

Similarly, there's evidence that using expert teachers to help younger teachers improve their teaching style, and to help introduce new teaching methods, works to lift performance.

The need to ensure taxpayers' money is being spent as effectively as possible is, of course, the object of the new inquiry Turnbull has asked The Great Gonski to perform.

It would be good to see him recommend setting up a national outfit to develop a body of evidence on the most effective teaching techniques, pass this to schools, and also conduct independent evaluations of new approaches tried in particular states or schools, making the results public.

And once we've lifted our schools' ability to teach conventional academic subjects, we should turn our minds to helping kids gain the softer skills – to communicate well, think critically, be creative and resilient – they'll need to survive in an ever-changing working world.

Monday, July 10, 2017

How Treasury lost its way on economic reform

From the almost stony silence of the nation's economists, you'd never know that Malcolm Turnbull's successful move to needs-based funding of schools is the most significant economic reform in many a long year.

It's notable, too, that this reform seems to have been achieved with little or no involvement by the high priests of economics at Treasury and the Productivity Commission.

Only a few economic reform projects are more important than raising the efficiency and effectiveness of federal and state spending on primary and secondary education.

Allocating that spending according to student need is the necessary first step towards the ultimate goal of reducing the shockingly high proportion of students who leave school without an education sufficient to go on to further study – in a trade course, for instance – or even to a life in which the normal state is employment, not recurring periods of unemployment.

The Australian economics profession's slowness to see the economic – not just the equity – significance of "Gonski" is a sign it's yet to learnt the lessons leading economists in America and Britain are drawing from the populist revolt against the way developed countries' economies have been managed during the era of "neo-liberalism" – better called economic fundamentalism.

Consider how well needs-based funding fits with former US Fed chairman Ben Bernanke's list of the economic managers' "errors of omission" in recent decades:

They failed "to expand job training and re-training opportunities, especially for the less educated; to provide transition assistance for displaced workers, including support for internal migration; to mitigate residential and educational segregation and increase the access of those left behind to employment and educational opportunities; to promote community redevelopment, through grants, infrastructure construction and other means; and to address serious social ills through addiction programs, criminal justice reform and the like."

It needs to be said that the first decade or so of "micro-economic reform" in Oz – floating the dollar, financial deregulation, eliminating protection, reforming the tax system, decentralising wage-fixing and reducing intervention in a host of highly regulated industries – was necessary, often unavoidable given what was happening in the rest of the world, and on balance, of great benefit to the populace.

It's impossible to imagine returning to the bad old pre-reform economy. Treasury and the Productivity Commission's predecessor body must be given most of the credit for promoting and designing these reforms.

But it's equally impossible to avoid the thought that, sometime been then and now, Treasury lost the plot, allowing the reform push to degenerate and be captured by business rent-seekers, politicians with ulterior motives and other government departments that didn't understand what they were doing.

To a fair extent the present populist revolt is explained by Bernanke's errors of omission: governments' failure to help the victims of the structural change their policies promoted and to ensure most of the cost of that assistance was borne by the winners from the change.

How could Treasury forget such an obvious way to minimise popular resistance and resentment of government-promoted change in the structure of industry?

Because it was misled by the mistaken notion that economic efficiency and distributional fairness are always at daggers drawn, and by the dubious ethic that economists should stick to promoting efficiency in the allocation of resources and leave fairness for others to worry about.

But also because Treasury allowed itself to be seduced away from strictly economic objectives to the essentially political objective of "smaller government".

We've got an economy heavily affected by multiple forms of market failure – including huge areas with public goods characteristics – but our overriding goal must be less government intervention in markets, less government spending and lower taxes, particularly on high income-earners.

There's little empirical evidence that economies with large public sectors perform worse than those with small ones, and no evidence that high marginal tax rates do much to discourage economic activity among high-paid full-time workers.

But Treasury's embrace of the smaller government objective does much to explain the Abbott-Turnbull government's loss of interest in budget repair (because cutting government spending turns out to be politically impossible), the neglect of measures to assist the losers from structural change (because they would add to government spending) and the lack of interest in reform of spending on education (because the need to go easy on the losers from spending reallocation means greater spending during the transition to more rational, cost-effective arrangements).

In the new era of populist backlash against the mounting evidence of stuff-ups in the later years of micro-economic reform, Treasury will continue to flounder and its influence wane until it switches its goal from smaller government to more effective government.

Saturday, July 8, 2017

How economic neglect has fed the populist revolt

Recent political shocks – Brexit, Trump and the failure of Theresa May – are prompting much soul-searching and rethinking among the world's leading economists.

Last week, for instance, Ben Bernanke, former chairman of the US Federal Reserve, gave a speech to a forum of the European Central Bank in which he admitted that "recent political events" had "cast a bright light on some disturbing economic and social trends in the United States".

"Unfortunately, policymakers in recent decades have been slow to address or even to recognise these trends, an error of omission that has helped fuel the voters' backlash," he said.

"If the populist surge we are seeing today has an upside, it is to refocus attention on both the moral necessity and practical benefits of helping people cope with the economic disruptions that accompany growth."

It's true that the American economy's cyclical recovery has entered its ninth year and appears to have room to run, Bernanke says.

Although the Great Recession was exceptionally deep and the recovery was slow, real gross domestic product is now up about 12.5 per cent from its pre-crisis peak and real disposable income is up more than 13 per cent.

Since the trough in employment in early 2010, more than 16 million new jobs have been created – compared with a workforce of about 160 million – bringing the rate of unemployment down from 10 per cent to 4.3 per cent, its lowest since 2001.

Fine. But Bernanke's new insight is in the title of his speech, "When growth is not enough".

Americans seem exceptionally dissatisfied with the economy and have been for some time, he says. Those who tell pollsters that the economy is "on the wrong track" consistently outnumber those who believe that America is moving "in the right direction" by about two to one.

Bernanke highlights four "worrying trends" that help explain the sour mood. First, stagnant earnings for the median worker.

"Since 1979, real output per person in the US has expanded by a cumulative 80 per cent, and yet during that time, median weekly earnings of full-time workers have grown by only about 7 per cent in real terms."

And almost all of that tiny growth is explained by higher wages and working hours for women. For male workers, real median weekly earnings have actually declined since 1979.

So despite economic growth, the middle class is struggling to maintain its standard of living.

Second, declining economic and social mobility. One of the pillars of America's self-image is the idea of the American Dream, that anyone can rise to the top based on determination and hard work.

But upward economic mobility in the US appears to have declined notably since World War II. One study of census figures found that 90 per cent of Americans born in the 1940s would eventually earn more than their parents did, but only about 50 per cent of those born in the 1980s would do so.

The trend to increased inequality of income and wealth is worse in the US than other advanced economies. This tends to impede economic mobility by increasing the relative educational and social advantages of people in the upper percentiles.

Third, increasing social dysfunction in economically distressed areas and demographic groups. Studies show that rates of midlife mortality among white working-class Americans (those with only a high-school education) have worsened sharply relative to other groups.

These are often "deaths of despair" because of their association with declines in indicators of economic and social wellbeing and the important role played by factors such as opioid addiction, alcoholism and suicide.

Indeed, in 2015, more Americans died of drug overdoses than died from car accidents and firearms-related accidents and crimes combined.

Among the most worrying economic trends is the decline in labour force participation among prime-age men – 25 to 54 – from 97 per cent in 1960 to 88 per cent today. The fall has occurred across demographic groups (an American euphemism for racial groups).

Studies suggest most of these men are idle – neither looking for work nor caring for family members. One part of the explanation is that America's high rate of incarceration leaves many men, particularly African-Americans, with prison records, which hurts their employment opportunities for many years.

Fourth, greater political alienation and distrust of institutions, both public and private. Americans generally have little confidence in the ability of government, especially the federal government, to fairly represent their interests, let alone solve their problems.

"Stagnant median wages, limited upward mobility, social dysfunction and political alienation are a toxic mix indeed. The sources of these adverse trends are complex and interrelated. But at a fifty-thousand-foot level, they appear to be the product of some broad global developments ... together with the US policy response (or lack thereof) to those developments," Bernanke says.

Missing from the response was a comprehensive set of policies aimed at helping individuals and localities adjust to the difficult combination of slower growth and rapid economic change.

Whatever the reason for this failure, "it's clear in retrospect that a great deal more could have been done, for example, to expand job training and re-training opportunities, especially for the less educated; to provide transition assistance for displaced workers, including support for internal migration; to mitigate residential and educational segregation and increase to access of those left behind to employment and educational opportunities; to promote community redevelopment, through grants, infrastructure construction and other means; and to address serious social ills through addiction programs, criminal justice reform and the like".

Bernanke concludes that "the credibility of economists has been damaged by our insufficient attention, over the years, to the problems of economic adjustment and by our proclivity towards top-down, rather than bottom-up, policies.

"Nevertheless, as a profession we have expertise that can help make the policy response more effective, and I think we have a responsibility to contribute where we can."

That's putting it mildly.

Friday, July 7, 2017


Talk to Australasian Teaching Economics Conference, Sydney, Friday, July 7, 2017

When Justin Wolfers, the great white hope of Australian academic economists, spoke to the Australian Business Economists in February, he paid a special tribute to two of his economics teachers, whom he named, thanking them for instilling in him a “love of economics”. They were his school teachers at James Ruse High, not his lecturers at the University of Sydney.

There are two lessons from this. First, despite the contempt in which it is held by many economics lecturers, high school economics has long been the main recruiting ground for university economics. Some years ago in NSW, and much earlier in Victoria, the number of students studying economics at high school fell sharply, following the introduction of a more useful-sounding – and less intellectually demanding – course, business studies. If those of you from NSW are wondering why you’ve many fewer students wanting to study economics than in the good old days, I’m convinced that’s a big part of the explanation. That, plus the growing recognition that university economics is a subject which is generally badly taught, in which you do a lot of maths without seeing what it proves or how it might be useful to you in the working world.

Which brings me to the second lesson: Whether you teach at school or uni, perhaps the single most important test of your success is whether you instil in your students a “love of economics”. Whether you convince them it’s interesting, important and useful. In my experience, it turns on whether you can visually and aurally demonstrate your enthusiasm for the subject and somehow convey this enthusiasm to your students. If you can infect them with your enthusiasm – your love – for the subject, you’ve done them a huge service.

What are my qualifications for offering reflections on the teaching of economics? Well, although I make no claim to being an economist – my qualifications are in accounting, and I prefer to describe myself as a journalist who writes about economics – I did have three years of economics in the commerce degree I gained from the University of Newcastle in the second half of the 1960s, so I am qualified as a student of economics. And whether or not I’m qualified, I have 40 years of experience as a teacher of economics – partly in lectures to high school and, occasionally, uni students of economics, but mainly in my newspaper columns, which have always put a heavy emphasis on teaching. I was a part-time tutor in accounting at UNSW for two years, which helped me realise how satisfying it felt being a teacher. I’ve also had some experience over the years as a hirer and trainer of the product of your labours: economics graduates. My job gives me plenty of contact with economists – particularly with top econocrats, almost all of whom are sufficiently well-qualified to be academics, but also with academics themselves – and also with high school economics teachers, who also aren’t economists, but teachers whose topic is economics.

Throughout the five years of part-time and full-time study it took me to get my pass degree, I suffered under an appalling misconception: that accounting was really interesting, while economics was boring and pointless. I had my heart set on becoming a chartered accountant, did economics only because I had too, and it wasn’t until after qualifying as a chartered accountant, becoming disillusioned, and then washing up at Fairfax in 1974, where it was suggested I become an economic journalist (because “economics and accounting are pretty much the same thing, aren’t they?”), that I realised I’d got that exactly the wrong way round: accounting was boring and relatively unimportant, whereas economics was infinitely interesting and involved grappling with problems such as inflation and unemployment, which were of considerable importance.

I blame my lecturers – who included Brian Johns for micro and Warren Hogan for macro – for allowing me to retain the delusion that economics was boring and irrelevant to the real world of business. To my recollection, they made no attempt to put the theory they were teaching me in a wider context – to help me join the dots. I can remember wondering what a model was, and thinking that none of the businesses I audited in Hunter Street ever mentioned using a demand curve to determine their prices. It never occurred to me to wonder that one of the businesses I audited was actually a (in those days, still legal) cartel, setting the prices for the pipes and tiles made by half a dozen pottery works in the Hunter Valley.

No one paused from their exposition of diagrams and models to explain why economics relied on theories embodied in geometric or mathematical models in its attempt to explain how the economy works, why models were, of necessity, a simplified representation of reality, why a model as complicated as the real world would explain nothing, that the game was about identifying key causal relationships and not worrying about less important complications, why the test of a model was whether its choice of which factors to include and which to ignore was well judged.

It was many years before I realised that, in my late teens and even though I’d worked full-time for a couple of years in the commercial world, I was far too inexperienced in the “real world” to make sensible judgments about whether what I was being taught would or wouldn’t be of use to me in the rest of my working life. That if my lecturers thought it worth teaching me this stuff, I should give them the benefit of the doubt. It was even more years before I realised that theories about how the world works were the main thing universities had to offer and pretty much the only thing they should bother offering. Every profession has a body of knowledge that attempts to find order among the chaos in the aspect of the real world that it professes to know about, and university is pretty much the only opportunity practitioners get to learn about that theory in any systematic way. So, provided they’re teaching good theory, universities should never apologise for being theoretical. There’s not much theory in accounting, but what there is is what I’ve found most useful from what I was taught.  As a commerce graduate, no one taught me how to do a bank rec, but that’s the sort of practicality you can pick up in the first few weeks on the job.

Apart from not bothering to explain the role and rationale of seemingly unrealistic theories, I can’t remember my lecturers or tutors making much effort to demonstrate how those theoretical insights could be used to shed light on real world problems. My mate Jeff Borland at Melbourne has published a great little book of first year case studies – one I give to each of my new recruits to economic reporting – and it’s not hard to find books of case studies based on newspaper reports, if you’re not capable of finding your own. Lecturers who preside over courses that fail to link theory back to real world issues deserve to be shot. They just can’t be bothered making the effort to move from theory for its own sake to theory because it can actually be quite useful – and thus interesting.

One of the keys to being a successful explainer of economics in the media is to take the trouble to work out where your audience is coming from: what they know, what they don’t know, what their misperceptions are, which aspects interest them and which don’t. Successful lecturers do the same. I imagine students taking first-year courses fall into three main categories: those who’ll do economics for just a year or two, then take away whatever and what little they’ve learn to last them for a lifetime as a teacher, accountant, businessperson or lawyer – and a voting citizen. I imagine these would be most numerous. Next in size would be those who complete a full major in economics and go on to be economic practitioners, working in the public sector, the banks and financial markets, or eventually as self-employed economic “consultants”, or even the odd journo. Last comes the smallest group, those who’ll go on to be your successors as academic economists.

I think the great temptation you face as academics is to aim your lectures to those three groups in inverse proportion to their numerical significance. My guess is that, consciously or unconsciously, most courses – particularly those beyond first year – are aimed at educating potential academics. Why? Because not bothering to change gear is more intellectually satisfying for the lecturer and requires less effort. Where first year economics is a terminating course – say for those who’ve been conscripted by the Business faculty - the main thing students need to take away is a deep understanding of some version of Mankiw’s Ten Principles of Economics. If you’re not doing that you’re short-changing a lot of your customers.

But the student group I worry most about are the future economic practitioners. I suspect that most academics are so inward-looking and arrogant that they take little pride in what is their main practical task and contribution to economic welfare: training practitioners, many of whom will have much greater influence over the management of the macro economy and the efficiency of particularly industries than their teachers ever will. When I write columns criticising “economists” for some failing, I often get angry feedback from academic economists, indignantly rejecting my criticism. To many academics, economist equals academic economist. It never crosses their tiny minds that my criticism is directed at a far more socially significant group: their former students, economic practitioners. Sorry, their performance worries me far more than yours, even though the adequacy of your teaching must bear its share of responsibility for the adequacy of their performance.

I have two related worries about the adequacy of your teaching of future practitioners. First is the way I believe that, too often, your academic enthusiasm for exploring limiting cases and other intellectual fascinations crowds out the far more important task of giving students as much practice as possible in applying models to the solution of practical problems. This, after all, is just what economic practitioners will spend their working lives doing.

My second worry about the adequacy of your teaching of practitioners is my belief that you spend far too little explaining the limitations of the models you teach. All theories and models have limitations, and introducing models while failing to identify their key limitations is professional negligence. You don’t truly understand a model unless you understand its limitations. If you don’t understand its limitations, you’ve learnt from a comic, not a textbook. What are the assumptions on which the model is built? Which are the most significant assumptions? Which are the explicit assumptions and which the implicit? I had studied and written about mainstream economics for many years before Geoff Harcourt told me something I hadn’t realised: it’s based on an implicit assumption that the parties to economic transactions are of roughly equal bargaining power. That’s a hugely important assumption.

Practitioners who use models without fully understanding their limitations – and who draw policy conclusions which they publicise without warning politicians and public of the key assumptions on which they rest – are a menace to the nation, contributing to the disrepute in which economists are often held. Stuart Birks, a senior lecturer at Massey University, has written a little book called 40 Critical Pointers for Students of Economics, available via the World Economics Association, against which all of you could usefully assess the adequacy of your efforts to ensure your students understand the limitations of the models you teach them.

Even worse, I worry that economics teachers don’t do nearly as much as they should to ensure their students understand that models are just models. I believe too many of your students walk away under the impression that some version of the neoclassical model actually is the economy. If so, you’re guilty of a terrible intellectual crime. Just this year someone who’s not an economist repeated to me the statistician George Box’s aphorism that “all models are wrong, but some are useful”. Is this what you tell your students? If not, why not? In Dani Rodrik’s recent book offering a critique and defence of conventional economics, Economics Rules, the main point he hammers is that “it’s a model, not the model. Economics is a collection of models; cherish their diversity.” I think it was Joan Robinson who advocated the “tool box” approach to economics: you assess a problem and its context, then reach into your tool box and select the particular model best suited to solving that problem. Is this what you teach your students?

I had intended to switch my critique from how you teach to what you teach, which I planned to kick off by saying that economics is half useful insights and half con job. But I’ve run out of time and if you want me to justify that assertion you’ll have to invite me back.