Turnbull's economic luck: more forecast than actual

It's usually in the interests of us followers to have a leader who is lucky. Malcolm Turnbull has had his share of bad luck but, of late, his fortunes seem to have changed. Latest proof is the mid-year budget update.

According to Scott Morrison and Mathias Cormann, everything is much improved. Although previous mid-year updates have revealed less progress than expected at budget time, this time the budget deficit is expected to be $5.8 billion lower than forecast in May.

The overall budget balance is still expected to be back in (a slightly larger) surplus in 2020-21, and this financial year is expected to be the last one in which the government needs to borrow to cover the day-to-day activities of government (as opposed to its spending on infrastructure), a year earlier than expected.

This means the Commonwealth's gross public debt is now projected to be $23 billion lower than expected by June 2021.

As for the economy, the Turnbull government's unwavering pursuit of Jobs and Growth has turned this from slogan to reality, we are told.

The economy is steaming on, but growth in employment – particularly full-time jobs – has been remarkable.

Well, yes – up to a point. There's good luck in the hand, and there's forecast good luck. Federal governments have been forecasting good results since the days of Wayne Swan and Julia Gillard – so far without much luck.

I would say we can give a fair bit of credibility to what is expected to happen between now and June, but forecasts and projections out another three years to June 2021 remain just that – forecasts.

The fact is that the government has had to revise downward its forecasts for the economy this financial year, but has left its forecasts for the following three years largely unchanged. Well, maybe, maybe not.

The government's forecast in May of a return to budget surplus by 2020-21 rested heavily on its prediction that, despite the extraordinary weakness in wage growth over the past four years, over the coming four years it would steadily return to boom-time rates.

Now these highly optimistic expectations have been shaved back, but only a little. I hope they come to pass, but I wouldn't bet much on it.

But what of the government's attempt to claim credit for the remarkably strong growth in employment over the past year?

I hate to shock you, but governments have been known to claim the credit for improvements that came to pass on their watch, even though the seeds of that improvement were sown before their time.

The surge in full-time jobs is explained largely by the delayed rollout of the National Disability Insurance Scheme (initiated by Gillard) and by the NSW and Victorian governments' increased spending on road and rail infrastructure (for which Joe Hockey can share some credit).

But if some of Turnbull's newfound air of success and optimism rubs off on the rest of us that, at least, will be no bad thing.

Read more >>

A bigger, better public sector will secure our future

There are important lessons to be learnt from the latest news about where our strong growth in employment is coming from. But if we listen to the nostrums of the Smaller Government brigade, we'll get them exactly wrong.

The (trend) figures we got from the Australian Bureau of Statistics last week showed employment growth of 370,000 – or 3.1 per cent – over the year to November. More than 80 per cent of the new jobs were full-time.

Great news.

But my esteemed colleague Peter Martin delved deeper and came upon a bigger story: the strong growth in employment has not been spread evenly across the economy, but is heavily concentrated in just two industries: "healthcare and social assistance" and construction.

It's also concentrated disproportionately in Victoria and NSW, and among women workers.

Why? Because, though employment in health and aged care has been growing strongly for years, the latest bout can be attributed mainly to the delayed rollout of the national disability insurance scheme initiated by Julia Gillard. Most of these extra workers would be female.

And because the strong growth in construction employment can be attributed mainly to a boom in infrastructure spending by the Victorian and NSW governments, much of it induced by Joe Hockey's incentive payment to state governments which engaged in "asset recycling" by using the proceeds from privatisation to build new infrastructure.

Oh no! You mean the growth in employment isn't the real deal? It's just some kind of temporary budget stimulus? It's not coming from the productive private sector, just from the unproductive, parasitical public sector, which wouldn't exist without the private sector's blood to suck upon?

Remember what I said last week about neoliberalism being ideology masquerading as economics? That last paragraph was a classic case.

It's true that, in some sense, the disability scheme and state infrastructure projects are instances of fiscal (budget) stimulus. But the notion that government deficit spending "crowds out" private sector spending is true only when the economy is booming and already at full employment – which we clearly aren't at present.

Just imagine how much weaker the economy would be now if government spending hadn't caused full-time employment to grow by up to 300,000 jobs over the past year.

The news that so much of the past year's employment growth has come from public deficit spending is actually vindication of the Reserve Bank's longstanding call for monetary policy (interest-rate) stimulus to be backed up by fiscal stimulus.

Note, too, that while even all full-time construction jobs are temporary in the sense that all projects end, employment associated with the disability scheme will continue indefinitely.

And, since governments tend to outsource both their construction projects and their disability care packages, most of the new jobs would actually be classed as in the private sector.

Of course, the notion that the private sector is productive but the public sector isn't is sheer economic illiteracy. We've long lived in a "mixed economy" in which most goods and services are produced by the private sector but, for good reason, some services are produced (or, at least, funded) by the public sector.

As I also wrote last week, economists are doing battle against the misapprehension scaring our youth that robots will reduce the amount of work needing to be done – the latest incarnation of what economists have long called the (fixed) "lump of labour fallacy".

While it's true new technology has been destroying jobs since the start of the Industrial Revolution, it's equally true that in those two centuries we've never yet run out of other jobs we'd like to pay someone to do for us.

Since the 1960s, a large share of these green-fields jobs has gone to women, facilitating their (continuing) mass movement back into the paid workforce after child-bearing.

But here's the most important lesson to learn from the news that most of the growth in good, full-time jobs in recent times has come from the government: much of the new demand for people to do new things for us will involve new jobs delivering services in, or funded by, the public sector.

That's because almost all the services best provided or funded by the public sector are "superior goods" – things we want more of as we get richer: education and training, healthcare, aged care, disability care and much else, even law and order.

So the greatest threat to continued growth in the "lump of labour" comes not from robots, but from those wanting to put some arbitrary cap on the size of government – and, of course, on the amount of tax we pay.

Read more >>

Who's ripping it off? Competition theory and reality

Puzzling over the rich economies' poor productivity improvement and weak wage growth (but healthy profits), American economists are pointing the finger at reduced competition between firms. But can this explain Australia's similar story?

Jim Minifie, of the Grattan Institute, set out to answer this in his report, Competition in Australia.

Economists regard strong competition between businesses as essential to ensuring market economies function well, to the benefit of consumers and workers.

Competition is what economic theory says stops us being ripped off by the capitalists. Firms that overcharge for their products lose business to firms that undercut them.

So competition pushes prices down towards costs (which economists – but not accountants – define as including the "cost of capital", or "normal profit", the minimum rate of profit needed to induce firms to stay in the market).

Competition helps ensure that economic resources - land, labour and (physical) capital – move to the uses most valued by consumers.

Competition also encourages firms to come up with new or better products – or less costly ways of producing a product – in the hope of higher profits. But those that succeed in this soon find their competitors copying their ideas, and bidding down the price to get a bigger slice of the action.

The innovations improve the economy's productivity (output per unit of input), but competition soon takes away the higher profits, delivering them into the hands of consumers, who often get better products for lower prices.

That's the theory. Question is, to what extent does it hold in practice? And does it hold less in recent years than it used to?

The simple theory assumes any market has a large number of sellers, each too small to be able to influence the market price. In practice, however, many of our markets are dominated by two, three or four big firms.

Why? Mainly because of the presence of economies of scale. It's very common that the more you produce of something – up to a point – the less each unit costs.

So, it makes great sense to have a small number of big firms doing much of the production – provided competition ensures most of the cost saving is passed on to customers in lower prices. Which, as a general rule, it has been over the decades.

Trouble is, big firms do have some degree of control over prices. And it's common for the few big firms in an industry to come to an unspoken agreement to compete using advertising or product differentiation, but not price.

Firms can increase their pricing power by taking over their competitors to get a bigger share of the market. It's the role of "competition policy" – run in our case by the Australian Competition and Consumer Commission – to prevent overt collusion between firms, and takeovers intended to increase market power. But how well is that working?

"Natural monopolies" – where it simply wouldn't make economic sense for more than one firm to serve a particular market, such as rival sets of power lines running down a street, or two service stations in a small town - are another common departure from the theoretical model.

So, what did Minifie find in his study of competition in practice? He found evidence it had lessened in the United States, but not here.

He found plenty of markets where a few firms did most of the business. But "the market shares of large firms in concentrated sectors are not much higher in Australia than in other countries [of comparable size], and they have not grown much lately," he says.

Nor have their revenues (sales) grown faster than gross domestic product. The profitability of firms – profits relative to funds invested - hasn't risen much since 2000.

Minifie identifies eight industries characterised by natural monopoly (in descending order of size): electricity transmission and distribution, wired telecom, rail freight, airports, toll roads, water transport terminals, ports and pipelines.

Then there are nine industries where large economies of scale mean they're dominated by a few firms: supermarkets, wireless telecom, domestic airlines, then (of roughly equal size) internet service providers, pathology services, newspapers, petrol retailing, liquor retailing and diagnostic imaging.

Next are eight industries subject to heavy regulation by government: banks, residential aged care, general insurance, life insurance, taxis, pharmacies, health insurance and casinos.

(Often, these industries are heavily regulated for sound public policy reasons, but the regulation often acts as a barrier to new firms entering the market, thus allowing them to be dominated by a few firms.)

But note this: by Minifie's calculations, natural monopolies account for only about 3 per cent of "gross value added" (a variant of GDP), while high scale-economies industries account for 5 per cent and heavily regulated industries for 7 per cent.

So that means the parts of the economy where "barriers to entry" limit competitive pressure make up about 15 per cent of the economy. Then there are 29 industries with low barriers to entry making up the rest of the "non-tradables" private sector, and about half the whole economy.

That leaves the tradables sector (export and import-competing industries) accounting for 14 per cent of the economy and the public sector making up the last 20 per cent.

Even so, Minifie confirms that, in industries dominated by a few firms, many firms make "super-normal" profits – those in excess of what's needed to keep them in the industry.

By his estimates, up to half the total profits in the supermarket industry are super-normal. In banking it's about 17 per cent.

Other companies and sectors with substantial super profits include Telstra, some big-city airports, liquor retailers, internet service providers, sports betting agencies and private health insurers.

Comparing this last list with the lists of natural monopolies and heavily regulated industries suggests governments could be doing a much better job of ensuring the regulators haven't been captured by the companies being regulated.

Read more >>

Robots won't reduce the amount of work we need to do

For me, one of the most significant economic developments of this year was realising how pessimistic many of our youth have become about their prospects of ever landing a decent full-time job.

To be sure, some degree of frustration on their part is understandable. Although it's true we avoided a severe recession following the global financial crisis of 2008, it's equally true that, until recently, employment growth has been weaker than usual in the years since then.

And the burden of this weaker growth has fallen disproportionately on young people leaving education to look for their first full-time job.

What's less understandable is the way older, and supposedly more knowledgeable, people have sought to demonstrate how with-it and future-focused they are by spreading wildly exaggerated predictions about how many jobs will be taken by robots, scaring the pants off our youth and convincing them they're doomed to a life of "precarious employment" in the "gig economy".

I'm sorry to say that the otherwise-worthy Committee for Economic Development of Australia was responsible for writing on many young minds the near certitude that 40 per cent of jobs in Australia are likely to be automated in the next 10 to 15 years.

The good news, however, is that, for once, economists were moved by all the amateur analysis they were hearing to join the debate about the future of work. Dr Alexandra Heath, of the Reserve Bank, dug out the hard evidence about how the nature of work is changing and Dr David Gruen, of the Department of Prime Minister and Cabinet, put worries about the shrinking number of jobs into their historical context.

But the charge has been led by Professor Jeff Borland, of the University of Melbourne, one of our top labour-market economists.

With a colleague, Dr Michael Coelli, Borland examined the papers behind the claim of 40 per cent of jobs being lost to robots, and found it built on questionable foundations. In their figuring, the 40 per cent was likely to be nearer 9 per cent.

And last week Gruen rejoined the fray, giving a big speech about it in, of all places, Jakarta.

Predictions about what will happen in the economy can be based on the belief that it will respond to new developments in much the same way it responded in the past to similar developments, or on the belief that "this time is different".

People who know little economic history are always tempted, as many people are now, to assume this time is different.

But economists have learnt the hard way that this time is rarely very different. The fact is, people have been predicting that the latest technology would reduce the number of jobs since the Luddites at the start of the Industrial Revolution.

Gruen reminds us that, in 1953, the great Russian-American economist Wassily Leontief wrote that "labour will become less and less important ... More and more workers will be replaced by machines."

Borland notes that, in the 1960s, Lyndon Johnson established a presidential commission to investigate fears that automation was permanently reducing the amount of work available.

In 1978, Monash University held a symposium on the implications of new technologies, with the convenor predicting that, by 1988, at least a quarter of the Australian workforce would be made redundant by technological change.

Then there was Labor legend Barry Jones' prediction in his best-selling Sleepers Wake! that "in the 1980s, new technologies can decimate labour force in the goods producing sectors of the economy".

Gruen admits that "there is no doubt that, over the past two centuries, waves of technological change have eliminated jobs, and rendered some occupations obsolete.

"But they have also facilitated the creation of new jobs to take their place – either directly, or indirectly as a result of rising standards of living generating new demands."

There are two processes at work, he says. One is that technology takes jobs away – this is the bit we can all see. What we can't see is the second process, the invention of new complex tasks, leading to new jobs.

The history of technological advance over the past 200 years has shown the second process has broadly kept pace with the first.

Computers have been changing the way businesses do their business – and destroying jobs – since the early 1980s. If that's all there was to it, there ought to be far fewer jobs today.

But the number of Australians with jobs has increased by a factor of 2.7 since the mid-1960s, while the average number of hours worked per person has remained broadly stable. Fact.

Like the economists, I find it hard to believe this relationship is about to break down because "this time is different".

What's true is that the nature of work has been changing – slowly – for the past 30 years or so, and this trend is likely to continue. It may accelerate, but it hasn't yet.

Using research by Heath, Gruen says routine cognitive jobs (such as office assistants, sales agents, brokers and drivers) and routine manual jobs (factory workers, construction, mechanics) are in less demand, whereas non-routine manual jobs (nurses, waiters, security staff) and non-routine cognitive jobs (engineers, management, healthcare, designers) are in increasing demand.

It's the changing nature of work, not a fall in the amount of it, we should be preparing for.

Read more >>

We should rescue economics from the folly of neoliberalism

There's no swear word in politics today worse than "neoliberalism". It's badly on the nose, and the reaction against it has a long way to run. But what is it, exactly? Where does mainstream economics stop and neoliberalism begin?

The term means different things to different people. Professor Dani Rodrik, of Harvard, says in the Boston Review the term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal (budgetary) austerity.

I've always thought of it as a fundamentalist, oversimplified, dogmatic version of conventional economics, one from an elementary textbook, not a third-year text that adds the complications of market power, externalities​ (costs or benefits not captured in market prices), economies of scale, incomplete and asymmetric (lop-sided) information, and irrational behaviour.

Rodrik's conception of the term isn't very different. He thinks mainstream economics needs to be rescued from neoliberalism because, as people heap scorn on it, we risk throwing out some of economics' useful ideas.

Which are? That the efficiency with which an economy's resources are allocated is a critical determinant of its performance. That efficiency, in turn, requires aligning the incentives of households and businesses with "social" costs and benefits (so as to internalise the externalities).


That the incentives faced by entrepreneurs, investors and producers are particularly important when it comes to economic growth. Growth needs a system of property rights and contract enforcement that will ensure those who invest can retain the returns on their investments.

And that the economy must be open to ideas and innovations from the rest of the world. Of course, economies also need the macro-economic stability produced by sound monetary policy (low inflation) and budgetary sustainability (manageable levels of public debt).

Does all that smack more of neoliberalism than mainstream economics to you? If it does it's because mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions.

"A proper understanding of the economics that lies behind neoliberalism would allow us to identify – and to reject – ideology when it masquerades as economic science. Most importantly, it would help us develop the institutional imagination we badly need to redesign capitalism for the 21st century."

There's nothing wrong with markets, private entrepreneurship, or incentives, Rodrik says, provided they're deployed appropriately. Their creative use lies behind the most significant economic achievements of our time.

The central conceit and fatal flaw of neoliberalism is "the belief that first-order economic principles map onto a unique set of policies, approximated by a Thatcher-Reagan-style agenda" – also known as the "Washington consensus".

Take intellectual property rights. They're good when they protect innovators from free-riders, but bad when they protect them from competition (as they often do when the US Congress has finished with 'em).

Consider China's phenomenal economic success. It's largely due to its orthodoxy-defying tinkering with economic institutions. "China turned to markets, but did not copy Western practices in property rights. Its reforms produced market-based incentives through a series of unusual institutional arrangements that were better adapted to local context," Rodrik says.

Some may say China's institutional innovations are purely transitional. Soon enough it will have to converge on Western-style institutions if it's to maintain its economic progress. Well, maybe, maybe not.

What neoliberal proponents of the single route to economic prosperity keep forgetting is that none of the economic miracles that preceded China's – in South Korea, Taiwan and Japan – followed the Western formula. And each did it differently.

Even among the rich countries we see much variance from the neoliberal cookie cutter. The size of the public sector, for instance, varies from a third of the economy in Korea, to nearly 60 per cent in Finland.

In Iceland, 86 per cent of workers are in a trade union; in Switzerland it's 16 per cent. In America firms can fire workers almost at will; in France they must jump through many hoops.

Rodrik repeats an old economists' saying, one forgotten by the neoliberal oversimplifiers. "Good economists know that the correct answer to any question in economics is: it depends."

It depends on the particular circumstances, on how well your economic "institutions" (laws, official bodies, norms of behaviour) fit with those the model assumes to exist, on what you're trying to achieve, on your priorities, and on the political constraints you face.

As the Chief Scientist, Dr Alan Finkel, said when asked if he preferred his own emissions intensity scheme to Malcolm Turnbull's national energy guarantee: "There are a lot of ways to skin a cat."

Economics has many useful insights to offer the community. It must be rescued from neoliberalism because neoliberalism is simply bad economics.

Read more >>

Mixed news as economy readies for better times

Scott Morrison is right. We're experiencing "solid" growth in the economy – provided you remember that word is econocrats' code for "not bad – but not great".

This week's national accounts from the Australian Bureau of Statistics show real gross domestic product grew by 0.6 per cent in the September quarter. Taking the figures literally, this meant the economy grew by 2.8 per cent over the year to September, way up on the 1.9 per cent by which it grew over the year to June.

But it's often a mistake to take the quarterly national accounts – the first draft of history, so to speak – too literally.

As Dr Shane Oliver, of AMP Capital, reminds us, the annual growth figure is artificially strong because the contraction of 0.3 per cent in the September quarter of last year dropped out of the annual calculation, whereas the 0.9 per cent bounce back in following quarter stayed in.

The bureau's trend (smoothed seasonally adjusted) estimates show growth of 2.4 per cent over the year to September, which is probably closer to the truth.

That compares with the economy's "potential" (maximum average rate of growth over the medium term, without rising inflation pressure) of 2.75 per cent a year. And with the Reserve Bank's forecast that growth over next calendar year will reach 3 per cent.

Since growth has fallen short of its potential rate for so long – creating plenty of spare production capacity – the economy can (and often does) grow faster than its medium-term "speed limit" for a few years without overheating.

And, although the latest reading isn't all that wonderful, there are enough good signs among the bad to leave intact the Reserve's forecast of better times next year.

(Remember, however, that much of the growth in all the figures I've quoted – and will go on to quote – comes from a simple, but often unacknowledged, source: growth in the population. The bureau's trend estimates show real GDP per person of just 0.3 per cent during the quarter and just 0.9 per cent over the year.)

Getting to the detail, we'll start with the bad news. Consumer spending – which accounts for well over half of GDP - grew by a minuscule 0.1 per cent during the quarter, and by a weak 2.2 per cent over the year to September.

Why? Because, despite remarkably strong growth in the number of people earning incomes from jobs, the increase in people's wages is unusually low – as measured by the national accounts, even lower than the 2 per cent registered by the wage price index.

Until now, households have been cutting their rate of saving so as to keep their consumption spending growing faster than their disposable (after-tax) income. They've probably been encouraged in this by the knowledge that the value of their homes has been rising rapidly, thus making them feel wealthier.

Now, however, Melbourne house prices are rising more moderately, while Sydney prices are falling a little. Price rises in other state capitals have long been more modest.

In the latest quarter, households' income rose faster than their consumption spending, meaning they increased their rate of saving. It's possible people have become more conscious of our record level of household (mainly housing) debt – though this is probably taking the (particularly dodgy) quarter-to-quarter changes too literally.

Next bit of bad news is that the boom in home building has finally topped out, with activity falling by 1 per cent in the quarter and by 2.3 per cent over the year.

There are a lot of already-approved apartments yet to be built, however. So, though home building's addition to growth has finished, it's future subtraction from growth shouldn't be great.

Which brings us to the first bit of good news. While investment in new housing has peaked, business investment in equipment and structures in the (huge) non-mining part of the economy is finally getting up steam.

According to estimates from Felicity Emmett, of ANZ bank, non-mining business investment rose by 2.7 per cent in the quarter, and by 14 per cent over the year.

The figures for business investment spending overall are even stronger, meaning spending in mining has been growing somewhat, not continuing to fall.

This doesn't mean mining investment has hit bottom, however. Higher commodity prices are prompting some minor investment, but there's a last minus yet to come from the completion of some big gas projects.

The other really bright spot is strong public sector investment in infrastructure – mainly road and rail projects in NSW and Victoria – which grew by 12.2 per cent over the year to September.

The external sector made no net contribution to growth, despite the volume of exports - minerals, rural, education and tourism - growing by 1.9 per cent in the quarter and by 6.4 per cent over the year.

That's because of a bounce-back in the volume of imports. Why, when consumer spending is weak? Because most investment equipment is imported.

If all these ups and downs are too equivocal to convince you the economy really is gathering strength, I have the killer argument: jobs growth.

As Morrison was proud to boast - apparently, all the new jobs are directly attributable to the government's own plan for Jobson Grothe​ - the increase in employment during the quarter was remarkable.

It rose by more than 90,000, with eight in 10 of those jobs full-time. Over the year to September, total employment rose by 335,000, an amazing increase of 2.8 per cent.

It's true the economy won't be back to its normal healthy self until wages are growing a bit faster than prices, reflecting the improvement in the productivity of labour (running at 1 per cent a year).

But an economy with such strong and sustained growth in full-time jobs simply can't be seen as sickly. And precedent tells us that where employment goes, wages follow.

Read more >>

Latest attack on welfare 'unworthies' is contemptible

Remember the Turnbull government's plans to drug test people on the dole? While you and I are diverted by all the political game-playing in this week's last session of parliament for the year, the government is hoping to slip these and other mean-spirited cuts in social security through the Senate – probably after some deal with the Xenophon-less Xenophones.

You can blame it on my Salvo upbringing – whose influence on my values seems to get stronger the older I become – but I have nothing but contempt for comfortably-off people who try to solve their problems by picking on the down-and-out.

If Australians can't do better than that, what hope is there for us?

The expected savings (which may or may not eventuate) of $478 million over four years are minor in a budget of almost $2 trillion over the same period.

But they'll be coming out of the hides of those most in need, those whose first lack of moral discipline was failing to pick the right parents, those whose luck has been worse than ours, those who've failed to deny themselves and their children the slightest treat at any time, the way we undoubtedly would had we been in their shoes.

They're the cuts a government makes when it wants to be seen to be acting to reduce the budget deficit, but lacks the courage to take on a fight with the medical specialists, drug companies, chemists, mining companies or other powerful interest groups guarding their own, much bigger slice of budget pie.

They're also the cuts you make when you're indulging your well-off supporters' delusion that the "unsustainable" growth in welfare spending is caused by all the cheating by the undeserving poor, not the retirement of the Baby Boomers and their success in getting around the age pension means test.

To be fair, what the Coalition plans is just a step up from the harsh measures imposed by their Labor predecessors. Labor's conscience has returned only now it's back in opposition.

Labor, however, tried harder to disguise its true motive of gratifying the workers' self-righteous envy of those living the cushy life on the dole or sole parent pension.

Labor governments profess to be into tough love. Using carrots and sticks to encourage people of working age off benefits and into a job, which will bring them more money and self-respect.

But I see little of that cant from the present supposed protectors of the disadvantaged, Alan Tudge and his problematically named boss, Christian Porter.

They seem all toughness and no love. They want to be seen as the great punishers and straighteners of the hordes of lazy cheats and bludgers and ne'er-do-wells sucking the blood of all the over-taxed, hard-working upper income-earners whose self-serving interests they were elected to promote.

Consider the plan to drug test people on the dole. It seems an exercise in emotionally gratifying punishment in search of an "evidence base".

According to the Rural Doctors Association, "people who are looking for a job do not generally have any higher incidence of drug use than those in the general population".

In 2013, the government's own Australian National Council on Drugs examined the idea and recommended against it, saying "there is no evidence that drug testing welfare beneficiaries will have any positive effects for those individuals or for society, and some evidence indicating such a practice could have high social and economic costs".

Almost all the doctors and other professionals actually involved in helping drug addicts have opposed the idea. They're particularly insistent that compelling people to undergo treatment doesn't work.

They won't be testing everyone on the dole, however, that would be far too expensive. Just 5000 people. But the amount the government expects to save by denying payments to those who fail the test suggests it doesn't expect the move to have any great deterrence effect. It's just an excuse to cut people off the dole and save money.

Other pettifogging measures in the bills the government hopes to get through this week include freezing benefit rates to wives and widowed pensioners until they're no greater than the "jobseeker payment" (the latest bureaucratic euphemism for the dole), getting rid of the 14-week bereavement allowance, tightening the job search requirement for those aged 55 to 59 (who, as we all know, could find jobs if they tried) and making it easier to suspend their dole, and delaying the start of payments for some welfare recipients.

Another much-needed reform is delaying the start of dole payments until any savings people have are exhausted (then wondering why they can't pay unexpected bills on the single dole of $268 a week).

Other changes would make it easier for Centrelink to "breach" (cut payments to) people judged to have failed to comply with their "mutual obligations". There's more, but you get the idea.

I'm just waiting for the bill that sools Centrelink's robodebt recovery machine on those cabinet ministers and others who breached the Constitution by claiming to be eligible for election when they weren't, but have received months of pay to which they weren't entitled.

Apparently, the rules applying to little guys whose behaviour is less than perfect are a lot tougher than those applying to top guys deciding how tough to be on the little guys. You get the tough, we get the love.

Read more >>

Politicians should get wings clipped on infrastructure

The more our ever-more "professional" politicians put political tactics ahead of economic strategy – put staying in government ahead of governing well – the more pressure they come under to cede more of their power to independent authorities.

The obvious instance is our move in the mid-1990s to transfer control over interest rates ("monetary policy") from the elected government to the independent central bank.

Shifting interest rates away from those tempted to move rates down before elections and up after them has proved far better for the stability of the economy.

Another issue on which voters don't trust politicians to make good decisions – mainly because of the risk of collusion between them – is their own remuneration.

So, first, responsibility for setting politicians' salaries, and now, their expenses, has been handed over to independent bodies.

Then there was the Gonski report's proposal that responsibility for determining the size of grants to public, Catholic and independent schools be taken away from deal-doing pollies and given to a properly constituted authority, following consistent and transparent criteria.

The idea was rejected by Julia Gillard but, particularly now the amazing variance in the deals Labor did with different school systems has been revealed under the Coalition's version of Gonski, there's still hope we'll end up with an independent, rules-based grants authority.

Some years ago, the Business Council took up a proposal by Dr Nicholas Gruen for the example set by monetary policy to be spread to fiscal (budget) policy. An independent body would set the budget's key parameters – for spending, revenue and budget balance – leaving the government to decide the specific measures to take within those parameters.

The idea didn't gain traction, but it may have boosted the push for independent evaluation of infrastructure projects.

You can see an admission that "something needs to be done" in the establishment of Infrastructure Australia by the Rudd government, and its rejig by the Abbott government, as a supposedly "independent statutory body providing independent research and advice to all levels of government".

Trouble is, the authority has little authority. Its role is to create the illusion of independent evaluation and reformed behaviour, while the reality continues unchanged.

There's no obligation for even the federal government to have all major projects evaluated, for them to be evaluated before a government commits to them and begins work, nor for those evaluations to be made public as soon as they're completed, so voters can debate the merits of particular projects with hard evidence.

Promises to build particular projects in a state, or even an electorate, are a key device all parties use to buy votes in election campaigns.

As Marion Terrill, of the Grattan Institute, has demonstrated, few of the projects promised by the government, opposition and Greens at last year's election had been ticked by Infrastructure Australia, and many of those it had ticked weren't on anyone's list of promises.

Terrill's research has revealed the huge proportion of government spending on capital works that's unlikely to yield much economic or social return to taxpayers.

For some years the Reserve Bank, backed by the International Monetary Fund and the Organisation for Economic Co-operation and Development, has argued that fiscal policy should be doing more to help monetary policy get our economy back to trend growth by spending more on worthwhile infrastructure projects. These would add to demand in the short run, and to supply capacity in the medium run by improving private sector productivity.

This changed approach would involve shifting the focus of fiscal policy from the overall budget deficit (including capital works spending) to the more meaningful recurrent or operating deficit.

This year's budget seemingly accepted this proposal, promising to give greater prominence to the NOB – net operating balance – and announcing two huge new infrastructure projects: the second Sydney airport and the Melbourne to Brisbane inland freight railway.

See the problem? Government infrastructure spending does wonders for the economy only if the money's spent on much-needed projects. As a proper evaluation would show, the inland railway is a waste of money (the product of a deal with the Nationals).

So it's little wonder that cities and infrastructure are the third big item, after healthcare and education, on the Productivity Commission's new agenda for micro-economic reform.

It's first recommendation? "It is essential that governments ensure that proposed projects are subject to benefit-cost evaluations and that these, as well as evaluations of alternative proposals for meeting objectives, are available for public scrutiny before decisions are made."

This is something the professed believers in Smaller Government, and those professing to be terribly worried about lifting our productivity, should be making much more noise about.

Read more >>

Good could come from bank royal commission

The banks and other opponents of a royal commission into banking told us it would generate a lot of noise and expense without achieving anything of value. They'll probably still be claiming that when the just-announced inquiry has reported.

Well, maybe. By contrast, I think there's a good chance the commission's establishment will be seen as the most visible marker of the time when the two sides of politics turned their backs on the era of bizonomics – the doctrine that what's good for big business is good for the economy and the punters who make it up.

The litany of misconduct by the big four banks – the unscrupulous investment advice given, the mistreatment of people with legitimate life insurance claims, the charges that the bank-bill swap rate was being rigged, and allegations of extensive use of bank facilities for money laundering – has driven the public's growing insistence that the banks be brought to account.

This week Rod Sims, boss of the Australian Competition and Consumer Commission, confirmed what all of us know, that competition in banking is weak ("not vigorous") leaving the big four with great ability to protect their excessive profits by passing costs on to their customers ("the large banks each have considerable market power").

The arguments of the banks and the Turnbull government that an inquiry must be avoided because it would shake confidence in the integrity and strength of our financial system – including in offshore markets – were just as weak then as they are now when used by the banks and the government to justify holding an inquiry to end the "political uncertainty".

The plain truth is that a rebellion by its own backbenchers has robbed the government of its ability to stop an inquiry going ahead.

This is the best explanation for the banks' sudden reversal from opposing an inquiry to claiming one is now "imperative". Since the revolt makes one inevitable, they'd prefer its establishment to be controlled by their Liberal defenders, not their Nationals, Greens and Labor critics.

They say a smart prime minister never commissions a report unless he knows what it will find and recommend. But that's easier imagined than achieved.

Were the commission's report to be judged by voters as a whitewash, with no significant consequences, this would simply ensure the bad behaviour of the banks remained a hot issue favouring the government's opponents at the next election.

What's just as likely is that royal commissioner Kenneth Hayne will interpret his terms of reference as he sees fit and, in any event, uncover a lot more instances of misconduct.

Broadening the inquiry's scope to cover misconduct in wealth management, superannuation and insurance, as well as in banking proper, is unlikely to leave voters thinking the banks' behaviour hasn't been as bad as they first thought.

Polling shows high public support for a banking royal commission, including among Coalition voters.

But the way the government has been forced by public opinion to abandon its attempt to protect the banks is a sign of much deeper public disaffection with the long-dominant "neoliberal" doctrine – formerly accepted by both sides of politics – that governments should do as little as possible to prevent businesses doing just as they see fit.

That when business mistreats its customers or it employees, there's nothing the government could or would want to do.

That big businesses' generous donations to both sides' coffers mean they have the politicians in their pockets. That the Turnbull government's desire to cut the rate of company tax on foreign multinationals that already avoid paying much is proof the economy's run to please the big boys, not you and me.

I've been writing for months about the breakdown of the "neoliberal consensus". This is evident in the way the Labor side has promised a banking royal commission, opposed big business tax cuts, opposed reductions in penalty rates, and pressed for constraints on negative gearing and the capital gains tax discount.

But set aside his resistance to a banking inquiry and (impotent) advocacy of big business tax cuts, and you see Turnbull's already doing much to respond to voters' rejection of the fruits of neoliberalism – privatisation, the various economic reform stuff-ups – with his new tax on multinational tax avoiders and coercion of particular companies in his struggle to fix the stuffed-up national electricity market and the cornering of the eastern seaboard gas market by three big companies.

Remember too the way, as part of his efforts to stave off a banking inquiry, Turnbull has become ever tougher on the banks, making them pay for more surveillance by the Australian Securities and Investments Commission and imposing a new tax on the five biggest of them.

In his most recent attempt to head off pressure for an inquiry, a proposed arrangement to compensate victims of bank misbehaviour, the banks would have been paying.

When the political smarties look back on this saga, my guess is they'll conclude Turnbull was mad to lose so much political credit in his abortive attempt to protect the banks from the public's disapproval of their greed-driven misbehaviour.

He should have got, much earlier than he did, the message that the era of governments pandering to big business was over, killed off by voters' disaffection with the political mainstream and willingness to flirt with the populist fringe.

I'm not sure Australia's big business has yet got that message, particularly not the big banks – transfixed as they are by their inward-looking contest to increase their profits and chief executive remuneration package by more than their three rivals have.

I support the royal commission because another year or more of public dredging through all the moral (and sometimes legal) shortcuts the banks have taken on their way to higher profits and bonuses may finally get the message through that their way of doing business – and treating their customers – must change.

Read more >>

WHY MONETARY POLICY HAS BECOME LESS EFFECTIVE AND HOW FISCAL POLICY CAN HELP

Comview 2017

As the monetarists used to like saying, monetary policy operates with “long and variable lags”. Which does much to explain why, for most of the time I’ve been an economic journalist, people have doubted its effectiveness. In 1989, when the Hawke government was struggling to slow a strong economy and booming commercial property market, with the cash rate hitting a peak of 18 per cent and mortgage rates a peak of 17 per cent, I remember a colleague writing it was clear that monetary policy had lost its power to dampen demand. That, of course, was just before the economy plunged into the severe recession of the early 1990s, its longest and deepest slump since the 1930s.

But the fear that tight monetary policy has lost its power to slow the economy is much rarer that the opposite fear that easy monetary policy has lost its power to speed the economy. Remember the old Keynesian jibe that cutting rates to stimulate demand is like “pushing on a string”? Until, of course, we’ve worked through the long and variable lags and discover the low rates have indeed boosted demand. But the fear that monetary policy has lost its power is much easier to credit in recent times.

Consider the facts. In November 2011, when the cash rate was at 4.5 per cent, the Reserve Bank decided it could stop worrying about an inflation surge and should cut rates to ensure continued trend growth. By December the following year, it had the rate down to 3 per cent. By August 2013 it was down to 2.5 per cent. It waited more than a year and a half to reduce the rate to 2 per cent by May 2015, then waited another year before making two more cuts to its present 1.5 per cent in August 2016. It’s maintained that record low for the 15 months since then. So the Reserve has cut the official interest rate by 3 percentage points on and off over the past six years, but the economy’s growth has been below trend for almost all of that time, leaving the present case for doubting monetary policy’s efficacy looking persuasive.

The big questions is why? We’ll get to that, but first I want to give you an update on the “framework” for monetary policy, the monetary policy “transmission mechanism”, including the “channels” through which monetary policy affects economic activity and inflation, and how we assess the “stance” of monetary policy using the “neutral” interest rate.

The monetary policy “framework”

Monetary policy - the manipulation of interest rates to influence the strength of demand - is conducted by the Reserve Bank independent of the elected government. It is the primary instrument by which the managers of the economy pursue internal balance - low inflation and low unemployment. Monetary policy is conducted in accordance with the inflation target: to hold the inflation rate between 2 and 3 per cent, on average, over time. The primary instrument of monetary policy is the overnight cash rate, which the Reserve controls via market operations.

The monetary policy transmission mechanism

The mechanism by which monetary policy affects economic activity (production and employment) and inflation can be divided into two stages: first, changes in the cash rate affect other interest rates in the economy and, second, changes in these in these interest rates affect economic activity and inflation.

Taking the case of an “easing” in policy, stage one involves the Reserve Bank deciding to lower the overnight cash rate (the market interest rate for overnight loans between financial institutions; also known as the “official” interest rate, or the “policy” interest rate). This causes financial markets to change their expectations about the future path of the cash rate and the structures of deposit and lending rates are quickly altered. The effect on short-term and variable interest rates happens much earlier than the effect on long-term interest rates.

Stage two involves households and firms responding to lower interest rates by increasing their demand for credit, reducing their saving and increasing their current demand for goods, services and assets (such as housing and shares). Other things equal, rising demand increases the prices of non-tradable goods and services. The rising demand tends to raise the cost of inputs, including labour, leading to higher inflation. According to estimates by the Reserve, lowering the cash rate by 100 basis points (1 percentage point) leads to real GDP being ½ to ¾ of a percentage point higher than it otherwise would be over the course of two years. Inflation typically rises by a bit less than ¼ of a percentage point per year over two to three years. It takes between one and two years for changes in the cash rate to have their maximum effect on economic activity and inflation.

The main “channels” through which interest rates affect activity and inflation

1. The saving and investment channel (also known as the “inter-temporal substitution effect”). Whether you are a saver or a borrower, interest rates are the opportunity cost of choosing to spend now rather than later. So lowering interest rates encourages households and businesses to reduce their saving or increase their borrowing so as to increase their spending on consumption or investment goods. Inter-temporal means “between time periods”, so reducing interest rates encourages people to bring their consumption and investment spending forward in time, whereas raising rates encourages them to push their spending off into the future. This (very neoclassical) channel is the main one referred to in textbooks and used in economic modelling of the economy. Note, however, the Reserve’s observation that “there is mixed evidence as to whether a strong relationship between lower interest rates and higher consumption growth actually exists”.

2. The cash flow channel. Lower interest rates influence the spending decisions of households and businesses by reducing the amount of interest they pay on debt and the interest income they receive on deposits. This affects the disposable income (or cash flow) they have available to spend. Clearly, lower rates have opposite effects on borrowers (those with more variable-rate debt than deposits) than lenders (those with more variable-rate deposits than debt), with borrowers having more cash to spend and lenders having less. Even so, the effect on borrowers outweighs the effect on lenders, so that a fall in rates leads to increased spending. This is because the household sector is a net debtor, with the average borrower household holding two or three times as much debt as the average lender household holds in interest-earning deposits. But also because the spending of borrowers is more sensitive to changes in cash flows than the spending of lenders. The Reserve estimates that lowering the cash rate by 100 basis points increases total household disposable income by about 0.9 per cent, which then increases household spending by about 0.2 per cent.

3. The wealth channel. A reduction in interest rates stimulates demand for assets such as shares and housing, raising their prices. This is because the lower rates increase the present discounted value of the assets’ future stream of income. Higher asset prices increase the wealth of households and businesses, which may lead them to increase their spending because they feel wealthier.

4. The exchange rate channel. When interest rates fall (relative to those on offer in other countries) this attracts less net inflow of foreign capital, which lowers our exchange rate. This improves the international price competitiveness of our export industries, as well as making it easier for our import-competing industries to make sales in the domestic market. So lower interest rates should increase the growth in our production (GDP). It also adds to inflation directly by increasing the price of imports. But Reserve estimates suggest the effect of interest rates on the exchange rate is relatively small, with an unexpected 25 basis point decrease in the cash rate estimated to lead to a ¼ to ½ per cent depreciation in the exchange rate. Other estimates suggest a 10 per cent depreciation increases the volume of exports by 3 per cent, while reducing the volume of imports by 4 per cent, within two years.

Assessing the stance of monetary policy using the neutral interest rate

While it’s easy to see that a cut in interest rates represents a move in a less restrictive, more expansionary (“accommodating”) direction, and a rise in rates represents a move in a more restrictive, more contractionary direction, this doesn’t tell us anything about whether the present level of interest rates is expansionary or contractionary – known as the “stance” of policy. We need a benchmark against which to determine whether the present level of rates is expansionary or contractionary. The benchmark we use is the “neutral” interest rate, the rate that’s neither expansionary nor contractionary. Comparing the cash rate (policy rate) with the neutral rate also shows us the degree to which the policy stance is expansionary or contractionary.

The neutral interest rate is the real policy interest rate required to bring about full employment and stable inflation (practical “price stability”) over the medium term. But what factors influence the level of the natural rate? Assuming a closed economy, all investment must be funded by domestic saving. The neutral interest rate equilibrates saving and investment at the level of income that is consistent with full employment and stable inflation. This means developments that increase saving will tend to lower the neutral rate, while developments that increase investment will tend to raise the neutral rate. This, in turn, means the neutral rate is influenced by three main factors: 1) the economy’s “potential” growth rate, 2) the “risk appetite” of the economy’s firms and households, and, since we actually live in an open economy, 3) global interest rates.

Our potential growth rate is determined by the three Ps – population, participation and productivity, it being a supply side concept. Our rate of population growth is high relative to other developed countries’, as is our rate of productivity improvement, so we have a relatively strong incentive for firms to invest, implying a higher neutral rate than the others. Like the others, our participation rate is reduced by the ageing of the population (retirement of the baby boomer bulge), but we have more scope for increased participation by older women. 2) When aversion to risk increases, firms become less willing to make long-term investments with uncertain return. This reduces the demand for borrowed funds, while increasing households desire to save, and so tends to lower the neutral rate. 3) Global interest rates have a big effect on our neutral rate because we are so open, but also such a small part of the global economy. Strong Australian demand for investment funds will attract capital inflow (of foreigners’ savings), pushing up our exchange rate, but also limiting the extent to which our neutral rate exceeds the world rate.

Because the neutral interest rate is “not directly observable” (just as it’s close relatives, the NAIRU and the potential growth rate, aren’t either) they have to be estimated by economists, meaning that different economists will reach different estimates. According to the Reserve’s estimates, our neutral rate was fairly stable at about 3½ per cent from the early 1990s until 2007 at the start of the global financial crisis. Since then it has declined steadily and is now about 1 per cent. Remember, these figures are real. Add an expected inflation rate of 2.5 per cent (mid-point of the inflation target range) and you get a nominal neutral rate of 3.5 per cent.

The Reserve says most of the decline of about 250 basis points since 2007 is explained by a decline in our potential growth rate (about 50 basis points) and an increase in risk aversion (100 points). Similar factors have been at work in the major developed countries, meaning their neutral rates have fallen to a roughly similar extent.

Why monetary policy is less effective in recent years

The continuing below-trend economic growth despite a major easing in monetary policy, and plenty of time for it to work its way through the economy, suggests monetary policy easing no longer has as much effect as it used to in stimulating demand. Similar conclusions drawn in the major economies may be explained by their need to resort to the less-effective quantitative easing once official interest rates had been cut to zero. But that doesn’t apply to Australia, and there is no reason to suppose monetary policy has become less effective simply because interest rates here are a lot lower (closer to zero) than they used to be.

In his last speech before retiring in 2016, the former Reserve Bank governor, Glenn Stevens, said he’d long held the view that monetary policy’s main effect on demand was via households, rather than businesses. This was because businesses’ decisions about investment were influenced more by their assessment of the outlook for growth and profits than by the cost of capital – interest rates. So the main channel through which expansionary monetary policy works is to use lower interest rates to encourage households to borrow and spend more. Stevens then argued that this hadn’t been as effective in recent years because our very high level of household debt (most of which is for housing) was making people reluctant to borrow a lot more.

It seems clear the new governor, Philip Lowe, agrees with this assessment. He has made the important point that monetary policy’s reduced effectiveness is likely to be asymmetrical: if households’ high debt stops cuts in interest rates from encouraging much additional demand, this should mean that increases in interest rates were a lot more effective in discouraging demand (because households’ high levels of debt mean a rise in rates causes a bigger hit to their cash flow).

There is little doubt that the long period of unusually low mortgage interest rates has done much to encourage increased borrowing for housing, particularly in Sydney and Melbourne, making already high levels of household debt even higher. House prices have risen at huge and worrying rates, with competition from housing investment buyers making it a lot harder for young people to afford their first home. In other state capitals, however – notably, Perth – house prices have been weak. This is a reminder of one longstanding drawback in using monetary policy to control demand: you can have only one, uniform interest rate for the whole economy, even though demand is too strong in some states and too weak in others.

There is continuing speculation in markets and the media on whether the Reserve will cut rates further – to get demand growing stronger and inflation back up into the target range – or whether it will start raising rates to stop the rapid rise in house prices and Sydney and Melbourne. My guess is the Reserve wouldn’t mind being able at do both at the same time. Since this is impossible, it is pleased to have help from “macro-prudential” measures taken by the bank regulator, the Australian Prudential Regulation Authority, APRA, in tightening its direct controls over banks’ lending for investor housing.

How fiscal policy can help

Dr Lowe, has stepped up pressure on the Turnbull government (echoed by the IMF and OECD) for fiscal policy to give more assistance to monetary policy in encouraging demand. The government has been preoccupied with achieving fiscal policy’s primary goal of “fiscal sustainably” (ensuring the level of government debt doesn’t get too high) by attempting to get the budget back to surplus - though with little success because of the weak growth in tax collections.

Dr Lowe has argued that the government should draw a clearer distinction between its spending for capital (infrastructure investment) and its spending for recurrent (day-to-day) purposes. It should focus on getting only the recurrent or “operating” balance back to surplus, which would leave it free to give more support to demand, as well as do more to improve productivity, by continuing to borrow for worthwhile infrastructure projects. In this year’s budget the government responded to this pressure, giving more prominence to the net operating balance – the NOB - and by initiating two big infrastructure projects, the second Sydney airport and the Melbourne to Brisbane inland freight railway, with more capital city road and rail projects to come.

Sources:

The Transmission of Monetary Policy: How Does It Work? Tim Atkins and Gianni La Cava, Reserve Bank Bulletin, September quarter, 2017

http://www.rba.gov.au/publications/bulletin/2017/sep/pdf/bu-0917-1-the-transmission-of-monetary-policy-how-does-it-work.pdf

The Neutral Interest Rate, Rachael McCririck and Daniel Rees, Reserve Bank Bulletin, September quarter, 2017

http://www.rba.gov.au/publications/bulletin/2017/sep/pdf/bu-0917-2-the-neutral-interest-rate.pdf

Read more >>

TRUTH, RATIONALITY AND POST-TRUTH

Royal Society of NSW, annual forum, Government House, December, 2017

We have had a lot of interesting and varied contributions on the topic of Truth, Rationality and Post-Truth, and I know from what people have said to me during the breaks how much you have enjoyed them. In summarising the various talks, I will try to draw out the range of views pertaining particularly to the central topic.

Opening proceedings, Don Hector asked us what had happened to reason, then told us that the post-modernists and relativists were in the ascendency, rejecting established sources of reason and accepting that belief should have equal sway with fact, and thereby putting an open, free society in great danger.

Simon Chapman, hero of the long-running battle against the tobacco companies to get restrictions on smoking and the harm it does, told us about his latest crusade, against the unfounded fear of wind turbines. Here, rather than battling powerful industrial interests, he’s been battling uninformed individuals, whose fears have been taken far too seriously by a conservative government containing many climate-change deniers.

James Wilsdon’s written contribution (spoken by the forum’s chairman, Paul Griffiths) told us about the Brexit experience, with its many fanciful claims and rejection of evidence and the views of experts. He quoted the leading Tory Brexiteer Michael Gove’s line that some have regarded as spine-chilling: “People in this country have had enough of experts.” As a political scientist he put a lot of our worries about truth and post-truth into a more realistic context, making them less spine-chilling.

Emma Johnston said we were in a post-truth era of virulent attacks on science and online trolls, in which the truth can be virtually impossible to distinguish from fake news. As a profession, scientists needed to shore up their standing in the community, asserting the importance of their work in contributing to evidence-informed decision-making. They needed to help the public recognise credible scientific knowledge within the new “information free-for-all”. They needed to change the culture that discourages scientists from speaking out. Genuine partnerships with communities, businesses and industries could go a long way to re-establishing trust in science.

Lisa Bero, from pharmacy, took a different, more professionally self-critical tack, reminding us of the way conflicts of interest arising from financial gain can reduce the influence of research evidence in policymaking, but then asking whether we should be paying more attention to the way conflicts of interest can bias the design, methods, conduct, interpretation and publication of research. We need to make our research trustworthy, she concluded. I conclude that some scepticism about the findings of scientific papers may indeed be justified.

Then Peter Gluckman spoke about the role of evidence and expertise in policymaking, making a host of realistic and enlightening points drawn from his extensive experience at New Zealand’s chief science advisor. He observed that science is not the only source of evidence political leaders take notice of (with a lot of attention given to advice from those less scientific beings, economists). And evidence is not the only thing policymakers take into account in the decisions they make. In a democracy, it’s not surprising they take account of public opinion. Nor that their attitudes are influenced by ideology. And, of course, their decisions often involve a degree of compromise in the face of conflicting interest groups.

Andrew Jakubowicz explained how the internet facilitates the spread of racism and reduces trust, damaging the functioning of multicultural societies. He proposed ways to reduce the problem.

Nick Enfield argued it was not remotely in the community’s interests to dismiss expert testimony from scientists, in the process diminishing our trust in them, in this “post-truth era” where we feel free to substitute “alternative facts”. Rather than simply criticising the things anonymous people say on social media, he singled out Tony Abbott’s assertion that “coal is good for humanity”, when “the overwhelming majority of people who are professionally qualified to evaluate scientific evidence on the matter know otherwise”.  (Economists are trained to weight the costs of actions against their benefits; taking account of its contribution to our material living standards since the Industrial Revolution, I would have thought that coal, too, has benefits as well as costs.) But then Nick made a very pertinent contribution, joining Don Hector in reminding us of the findings of the psychologist Daniel Kahneman, who won the Nobel memorial prize in economics for his role as a founder of behavioural economics. Kahneman demonstrated that, most of the time, humans are unthinking, emotion-driven, non-rational animals notorious for their poor reasoning, even though they can, at times, reach the heights of rational reasoning we see our scientists attaining in, for instance, Newtonian physics and Einstein’s theory of relativity. Which of those two, by the way, is or was the truth?

So, what are my thoughts about all this? Sorry, but the journalistic scepticism which is my substitute for scientific scepticism leaves me unconvinced by much of it. As a journo would put it, I think it’s a beat up. I can understand how frustrating scientists must find it to discover there are uninformed people who simply reject the scientific evidence of global warming, and are impervious to counter argument. Indeed, the psychologists tell us, the more dire the scientists’ warnings about how little time we have left to prevent hugely damaging climate change, the more the deniers are reinforced in their denial. I can understand how shocking many scientists find it to be told to their face that they’re not believed, not telling the truth, but are making up crises to get more research funding. But I don’t find this evidence-denying, unreasonable, irrational behaviour, this refusal to use one’s brain, all that surprising. I’ve lived with it every week of the 40 years I’ve been a commentator on economics. It strikes me that hard scientists know a lot about how the physical world works, but not a lot about how humans work.

Nor do they seem to know much about how the political game is played. Did you know, for instance, that people are given a vote regardless of how uneducated they are, how unthinking they are, how willing they are to give free rein to their instant, emotional reactions to developments, and their refusal to use their grey matter for anything other than enhancing their encyclopaedic knowledge of cricket scores and reality television? Did you know that humans are prone to tribal behaviour? That politicians have, for their own venal reasons, turned climate change into a tribal issue, where your tribe believes in it, but my tribe doesn’t? That I can close my mind to all your incomprehensible arguments, can simply refuse to accept that your professed expertise means you know the truth but I don’t, for no reason other than that me and my tribe don’t believe that sh*t?

I’m not convinced we live in the post-truth era. As we have heard, the Oxford dictionary defines “post-truth” as “circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief”. And this is something new, is it? We used to live in a world where rational analysis reigned supreme, where no one ever used facts selectively, no one quoted a fact that needed checking, and all the policy decisions politicians made were based strictly on evidence, where anything said by someone wearing a lab coat was accepted without question, but then along came the internet and social media, and suddenly all respect for the truth, and facts and evidence and experts went out the window. Really? I think we’ve always lived in a world where a lot of people are pretty dumb, where many chose not to use their brains for the purposes scientists think they should, where they much prefer to give their emotions free rein, where anti-intellectualism is common. To me, this isn’t something new, it’s a description of the human condition. To attribute it to the ascendancy of post-modernist intellectualising rather than the prevalence of mug punters is to engage in intellectual delusion.

What’s changed is that the internet and social media have given the anti-intellectuals and tribalists and racists a microphone through which to broadcast. One effect of this is to make our tribe far more aware of the terrible things other tribes have always thought and said about us while out of our hearing. This does mean there’s now a lot more scope for people to be shocked and hurt by the new knowledge of the terrible things other people think and say about them. The internet and social media have also made it far easier for disparate members of particular tribes (including the science tribe) to find each other and engage in orgies of confirmation bias. To rev each other up. As has been observed today, social media has facilitated the development of many and varied echo chambers. What’s less obvious to me is how much real difference this upsurge in preaching to the choir makes. It probably does contribute to the other forces making our politics and our community more polarised. Many speakers today have implied that there’s been a big increase in the community’s anti-intellectual attitudes and behaviour. This may or may not be true. Ironically, no one produced any hard statistical evidence that it is. One alternative explanation for the trends we think we see and attribute to the digital revolution, but which hardly rated a mention today, is the longstanding decline in standards of political behaviour by the mainstream parties, which is prompting increasing numbers of voters to flirt with various strains of populism.

I think I detected a far bit of tribal, ra-ra thinking by the science tribe in what was said today. Science and scientists are being disrespected as never before and we must lift our game and fight back. I suspect I heard echoes of nostalgia for the good old days when the pronouncements of scientists were accepted with respect and without question, much as people in olden times wanted their priests just to tell them what to do, and not do, to live moral life. Let me remind you that our population is better educated than it’s ever been, and one of the things they try to teach you at uni is to think critically about the pronouncements authority figures make, even those who tell you they’re experts. Don’t just nod when your doctor tells you something, put them through their paces.

The digital age has made us more conscious of the anti-intellectualism and intolerance that has always been with us. It may also have added to the quantity of that dysfunctional thinking and behaviour. In any event, it has made us more conscious of the need to find new and more psychologically effective ways of getting through to those we believe need the benefit of our enlightenment.

Read more >>