Services are taking over the economy – despite the politicians

One test of whether our political leaders are looking to the economy’s future or clinging to its past is whether they show an understanding that most of our future lies in the services economy.

Whether they hanker for an economy where most people earn their living by growing things, digging things out of the ground or making things.

Probably only the dearly departed Malcolm Turnbull passes this test, with his early enthusiasm for innovation and agility. Kevin Rudd said he didn’t want to be the leader of a country that didn’t make things. Scott Morrison took a lump of coal into the Parliament to show where his allegiances lay.

But as the Organisation for Economic Co-operation and Development reminds us in its latest report, the shift from producing goods to performing services is fundamental to the process of economic development.

Every country’s economy starts on the economic development journey with most people working on the land, and others in mines. That’s where we were in the 19th century. About a hundred years ago, the great migration from the country began, with more and more people moving to the city to work in factories.

By 1971, employment in manufacturing had reached 1.4 million workers. Manufacturing’s share of total employment in Australia reached 25.5 per cent a little earlier in 1966.

But from that period on, employment in manufacturing began to decline, both in absolute numbers and as a share of the total.

It – and employment in the other goods industries: agriculture and mining – declined as a share of the total simply because employment in the services sector grew much faster.

So, for at least for the past 50 years, it’s services that have been going up while goods industries have been going down. That’s true whether you look at shares of total employment or shares of total production (gross domestic product).

When you turn to the absolute numbers of workers, they’ve been declining in agriculture for more than a century. Today, just 325,000 people work on the land.

In manufacturing, they’ve been falling since 1971, to be down to 980,000 today.

Mining employment got a fillip from the resources boom, but even its job numbers have resumed their decline since 2013, and are now down to 245,000 – or just 2 per cent of our total employment of 12.6 million.

There’s nothing peculiarly Australian about this move from farming to manufacturing to services. You can see just the same progression in other rich economies and in “emerging” (that is, rapidly developing) economies.

It’s been unfolding before our eyes in China since it began opening its economy to the world in the late 1970s. It was all the people leaving its farms to work in city factories that, a few years ago, took the proportion of the world’s population living in urban areas to more than half.

Returning to Oz, don’t get me wrong. Some of us will always be working in the goods part of the economy. That’s particularly true of Australia because, though we’ve never been great shakes at manufacturing, we have had, and will continue to have, a comparative advantage in agriculture and mining, relative to other countries.

Note this: though the number of people working in the three parts of the goods sector has been falling, that doesn’t mean we’re growing less food or digging fewer minerals. Our annual production of food and minerals and energy is greater than ever. Even in manufacturing, our annual production has been falling only since 2008.

How can production go up while employment goes down? Easy. Increased productivity of labour caused by automation – technological advance. The use of more and better machines has made farming, mining and manufacturing more “capital-intensive” and so less “labour-intensive”.

That’s the thing about the goods side of the economy: it’s relatively easy to use machines to replace men (and women). And this isn’t bad, it’s good – for two reasons. First, it’s helped make goods cheaper, thus making us more prosperous.

Second, it’s much harder to use machines to replace workers delivering services. Robots will change this to an extent, but by not nearly as much as the alarmists claim.

And it’s not hard to think of more services we’d like other people to do for us. That’s why total employment is higher than it’s ever been. And why further growth in services’ share of total employment and production is inevitable and inexorable.

Where will the new jobs be coming from? That's where.

The OECD report tells us that, in 2014, the goods sector’s share of production was down to 17 per cent (agriculture 3 per cent, mining 6 per cent, manufacturing 8 per cent), with the services sector’s share up to 83 per cent – about average for the OECD.

Within services, the biggest industries are: business services, 14 per cent of GDP; wholesale and retail trade, 10 per cent; financial services, 9 per cent; construction, 8 per cent; health and aged care, 7 per cent; education 5 per cent and defence and public administration, 5 per cent.

A favourite argument the goods industries use to exaggerate their importance to the economy is to point to their higher share of exports (a widget sold to a foreigner is more virtuous than one sold to a local, they claim).

A third of all our agricultural production is exported. For manufacturing it’s more than a quarter (bet you didn’t know that) and for mining it’s more than 90 per cent. For services it’s a mere 11 per cent.

This means that, as usually measured, agriculture contributes 8 per cent of total exports; mining, 40 per cent, manufacturing 26 per cent, and services, 26 per cent.

Education of overseas students is now our third biggest export, after iron ore and coal. Tourism is the other big one.

But the OECD points out that the goods we export have inputs of services embedded within them. Allow for this and agriculture’s share of total export “value-added” drops to 5 per cent, mining’s to 30 per cent and manufacturing’s to 13 per cent, while services’ share rises to an amazing 52 per cent.

Services are taking over the economy. Live with it.

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Don’t worry, you’ll have plenty in retirement

Some years ago I went to an investment adviser, gave him my financial details and asked if I had enough super to do me in retirement. He didn’t answer, just laughed. I think he thought that someone with my amount of savings shouldn’t have needed to ask.

Truth is, no matter how high or low the standard of living we’re used to, just about all of us worry that we haven’t saved enough to keep it going in retirement. No matter how much we’ve put away, it’s only human to feel a twinge of guilt that we could have saved more. And how much is enough?

The superannuation industry has spent decades convincing us our savings are inadequate, and pressing the government to raise the rate of compulsory super contributions. The “retail” super funds run by the banks keep doing this, but so do the not-for-profit industry funds.

It was they who persuaded the Rudd government to phase the rate up from 9 per cent of wages to 12 per cent by 2025.

But now, at long last, a report by John Daley and Brendan Coates, of the Grattan Institute, has hit the headlines exposing the Great Super Lie. In the words of its title, Money in retirement: More than enough.

The report’s careful and detailed analysis finds that, contrary to everything we’ve been told, the vast majority of retirees today, and in future, are likely to be comfortable financially.

The institute’s own modelling shows that, even after allowing for inflation, most workers today can expect a retirement income of at least 91 per cent of their pre-retirement income. This is way above the 70 per cent level that the Organisation for Economic Co-operation and Development recommends its member-countries aim for.

But how can reality be so at variance with our perception of it? Because the super and investment-advice industries have laboured long and hard to convince us we should be saving more.

Why have they done this? Because every extra dollar we save through super, whether voluntarily or compulsorily, is a dollar they get to take a small bite out of – every year until we eventually take it and spend it.

They call it “clipping the ticket”. The financial services sector abounds with people who’ve thought of another reason to clip our ticket. That’s why its top people are the highest paid of them all, the envy of medical specialists and barristers.

How have they misled us? As the report explains, by exploiting our inability to anticipate how much we’ll need to last us in retirement.

ASFA – the Association of Superannuation Funds of Australia – is the chief offender. It publishes and updates a measure of the minimum amount you’ll need at retirement to live at a “comfortable” standard. If you don’t have that much then, by implication, you’ll be un-comfortable.

Trouble is, it’s designed to reflect a lifestyle typical of the top 20 per cent of retirees today. So, in truth, it’s telling the bottom 80 per cent they haven’t saved nearly enough to have in retirement a standard of living far higher than they ever enjoyed while working.

Obviously, when estimating how much you’ll need, you have to allow for inflation over the likely period of your retirement. Some in the industry exaggerate this by using the expected growth in wages – rather than prices – as their inflation measure, knowing that wages grow faster than prices and living standards rise over time.

After being misled for so long, you probably find it hard to believe your savings are – or will be – more than adequate, so let me explain.

First, most people will have more income than they realise. Most people will be eligible for a full or part age pension, which is increased in line with wages rather than prices, meaning it grows faster than inflation over time.

By now, most people are retiring with a significant amount of super saving. It was always envisaged that most people would retire with some combination of age pension and super.

About 80 per cent of people over 65 own their own home (a huge saving) and most have savings and investments outside the super system.

Second, people spend less money in retirement than they used to, and than they expect to. That’s why the OECD says you need only 70 per cent of your pre-retirement income to be comfortable.

The retired pay less income tax on the same income, whatever it is. They don’t make super contributions, they don’t have mortgages (though those who rent privately are the big exception to the rule) and they don’t have kids to support.

They eat out less (partly because they have more time to cook), drink less alcohol, spend less on transport (no trips to work) and replace clothing and furniture less often. Medical costs are a lot higher, but are largely covered by the government.

And it’s not just that when you’re retired you have less need to spend than when you’re working. It’s also that you spend less as you get older. Spending tends to slow when you reach 70, and decreases rapidly after 80.

Still not convinced? Get this: surveys show the retired worry less than the working about paying bills, many actually save some of their income and often leave a legacy almost as large as their nest egg on the day they retired. Sounds comfortable to me.

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Our oldies have never had it so good

Don’t let anyone tell you Scott Morrison is out of touch. When he says that, if he had the money, he’d increase the age pension rather than the dole, he’s reflecting the views of most older Australians. Everyone knows it’s the old who are the deserving poor.

Except it ain’t true. It was true once, but not for many years.

You might expect the Prime Minister to be better informed than the average punter, but Morrison is from the new breed of politician who see a leader’s job as to reflect the voters’ misperceptions back to them. Read the focus group reports, not the briefing notes.

Something Morrison clearly hasn’t read is the research briefs published last week summarising the findings of the Centre of Excellence in Population Ageing Research – an outfit funded by the federal government to ensure it (and the rest of us) are well-informed about matters such as the adequacy of the age pension.

According to the centre’s director, Professor John Piggott, of the University of NSW, “our analysis shows that standards of living of older people have improved over the last decade . . . Households reaching retirement age today have incomes about 45 per cent higher than those reaching the same milestone 10 years ago.”

That’s a real increase of 45 per cent, after taking account of inflation. How could it be possible? Because the pension is indexed to wages rather than prices, and wages grow by a per cent or two a year faster than prices (until recently, anyway).

As well, the Rudd government made a discretionary increase in pensions on top of indexation.

The centre’s figures show that 62 per cent of age pensioners get it at the full rate, with a quarter getting a part-rate pension because of their other income, and another 13 per cent on a part-rate because of the high value of their non-housing assets.

The centre finds that the rate of poverty (measured as less than half the median household disposable income) among everyone aged 65 and over is only a fraction higher than for everyone aged 15 to 64.

Even so, by now it’s wrong to think of many people retiring with nothing to support them but the pension. Our retirement income system rests on three pillars, with the means-tested, flat-rate age pension being only the first.

The second pillar is compulsory employer superannuation contributions under the “super guarantee”, which began formally in 1992 and reached 9 per cent of wages in 2002. Today it’s 9.5 per cent.

By now, therefore, most people should be retiring with some super savings, maybe quite a lot. The centre says that, in 2016, the median (most typical) super balance for individuals aged 60 to 64 was $68,000, whereas the arithmetic average was three times that, at $214,000 – pushed up by a small number of very much higher balances (including mine).

The median is held down by the typically much lower balances of women, which average 64 per cent less than men’s. Even here, however, the centre says the gap has almost halved over the past decade.

The retirement income system’s third pillar is voluntary super contributions, which are “tax-advantaged”.

Compulsory and voluntary super contributions are already sufficient to mean that 40 per cent of people on the age pension have super and investments as their main source of income. And 20 per cent of older people have so much other income as to make them ineligible for the pension.

But the system actually has a fourth pillar: home ownership. (And a fifth: assets and other savings outside the first four pillars.)

Get this: three-quarters of age pensioners own their home. The centre estimates that, on average, living rent-free in your own home yields a saving of more than $10,000 a year. (As well, the oldest households receive health-related savings averaging about $25,000 a year.)

So significant is the fourth pillar of home-ownership that it’s implicitly assumed in judging the age pension’s adequacy – meaning the quarter of age pensioners who mainly rent privately are justified in complaining about the trouble they have making ends meet.

About 40 per cent of renters aged 65 and over are below the poverty line. And, among those of them living alone, the poverty rate rises to 60 per cent.

If Morrison really cared about the elderly poor, he’d raise the pension rent supplement, which wouldn’t cost much.

In truth, however, his remarks last week were probably more about signalling: the aged – particularly the better-off aged; those dreading Labor’s plan to abolish unused dividend franking credits - should see themselves as part of his party’s “base”, whose interests he represents and will fight for.

Renters of any age aren't part of the base. Nor are the young part of it – and others with a greater risk of finding themselves on the dole – so their interests take a lower priority. Don’t say he didn’t tell you.

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Weak competition may be key to economy's problems

If you think there isn’t enough competition between the big four banks, the big three power companies, the big two airlines, the big two supermarkets and in a lot of other industries, Andrew Leigh agrees with you.

He has evidence the “concentration” within our industries is increasing. What’s more, he thinks it could be part of the reason we – and the rest of the developed world - are suffering from slower economic growth and productivity improvement.

Dr Leigh is a Harvard-trained former economics professor at the Australian National University and now the federal opposition’s spokesman on competition.

In a speech this week, he said it’s hard to think of many Australian industries these days that aren’t dominated by just a few behemoths.

“Whether it’s Coles or Woolworths, Lion or Carlton, Caltex or BP, Medibank Private or BUPA, Qantas or Virgin – it seems consumers don’t have a great deal of choice where they get their goods and services from,” he says.

A standard measure of concentration judges an industry to be concentrated if the top four players control more than a third of the market.

With the ANU’s Dr Adam Triggs, Leigh calculated this measure for 481 Australian industries, finding that half of them were concentrated.

“In department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, internet service providers, baby food and beer, the biggest four firms comprise more than 80 per cent of the market,” Leigh says.

(Of course, concentration isn’t a foolproof way of measuring the degree of competition. For instance, the two big newspaper companies – one of which owns this august organ – face competition from a huge number of digital news providers. And competition from more specialised retailers makes it seem department stores’ days are numbered.)

Economies of scale mean our small market is more concentrated than big economies. Leigh says our commercial banks, petrol retailers and liquor retailers are more than three times as concentrated as those in the US.

Our department stores, airlines, soft drink manufacturers and cardboard box makers are all significantly more concentrated.

As a general rule, greater market concentration gives the small number of big firms increased “market power” – ability to influence the prices they charge. It may also give them power to extract lower-than-reasonable prices from their suppliers.

Leigh notes American evidence that big companies in concentrated markets were almost 20 per cent slower in paying their suppliers than small companies were.

As to anti-competitive behaviour more generally, Rod Sims, boss of the Australian Competition and Consumer Commission, said recently that “many well-known and respected major Australian companies have admitted, or been found, to have breached our competition and consumer laws. These same companies regularly [claim] to put their customers first”.

In reaction to the growing market power of our big firms, Leigh says, governments have added civil fines for unconscionable conduct, criminalised the forming of cartels, and increased penalties for breaches of consumer protection laws.

Another problem is poor regulation of monopoly businesses that have been privatised. “Whether it is a port or an airport [or, he could have added, an electricity transmitter], it is important that governments ensure that the gains to taxpayers from selling an asset aren’t offset by the losses to consumers from higher prices,” Leigh says.

He notes that, in 2008, the ACCC received about 34,000 complaints by consumers. By 2016, it was closer to 60,000.

But why are Australian markets so heavily concentrated, and probably becoming more so? Partly because of a decline in the rate at which new businesses are being created: from an average annual rate of 16 per cent before 2010, to 13 per cent since then.

But also because of a big increase in company mergers and acquisitions. Between 1992 and 2017, their number increased almost five-fold from 394 a year to 1960 a year.

An international study has found that, in Oz, the average prices charged by large, stock exchange-listed firms were close to their marginal cost of production in 1980, and stayed there until the late ‘90s.

By the early 2000s, however, they’d risen to 40 per cent above the marginal cost. By 2010, they were 50 per cent above and by 2016 they were 60 per cent above.

In the US, there’s growing evidence that market concentration may be suppressing business investment. One study found that 80 per cent of the decline in US investment since 2000 can be explained by less competitive markets and increased ownership of shares by institutional investors.

As top US economists Paul Krugman and Larry Summers have said, the odd combination of high company profits but weak investment (at a time of low interest rates and high share prices) is just what you’d expect to see if market power was increasing.

Leigh says weak competition may help explain why wage growth is weak here and in other developed countries. “Wages are fundamentally driven by the competition between firms for workers. Less competition means lower wages,” he says.

A British study by Professor Stephen Nickell, of Oxford, found that a 25 per cent increase in market concentration leads to a 1 per cent fall in productivity.

An American study of detailed data at the firm level for all US manufacturing industries, found that mergers were associated with increased price mark-ups, but there was little evidence they boosted productivity.

Leigh concludes that “Australia has a competition problem: there is not enough of it. Our industries are concentrated. Anti-competitive conduct is rife. Our consumers are treated poorly.

Our markets show the signs of weak competition. "There has been a massive increase in mark-ups among large listed firms over the past two decades.”

What to do about it? We shouldn’t adopt an "overly permissive" approach to company mergers. We should take “a more circumspect approach to claims of [greater] efficiency when considering anti-competitive conduct”.

We should give the ACCC the investigatory powers it needs. We should ensure that penalties aren’t so small they can be treated as just a cost of doing business.

We should consider the impact of anti-competitive conduct on innovation, and recognise that unchecked market power can harm workers as well as consumers.

Sounds to me like an election manifesto.

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Drought: a choice between sympathy or lasting help

What a good thing elections are. Were it not for the looming federal election – not forgetting those in Victoria and NSW – we city slickers might by now have forgotten the drought that continues to damage much of eastern Australia. Collections taken, donations given, end of.

Not so our tireless Prime Minister. Scott Morrison’s put the drought at the top of his to-do list of problems to be sorted before the election. And having fixed high electricity prices earlier in the week, on Friday he held a national drought summit, announcing a $5 billion Drought Future Fund.

From July 2020, the fund will provide grants worth up to $100 million a year for community services and research, and to assist the adoption of technology to support long-term sustainability in periods of drought.

Details yet to be decided. What it amounts to is anybody’s guess. It could be something that really would improve our farmers’ resilience to future droughts, or it could be just another slush fund for spending in National Party electorates.

The thing about droughts is that when the media eventually find out about them and start making a fuss, there’s an outpouring of concern and everyone wants to help. Individuals reach for their purse; governments want to be seen taking charge and doing the right thing by our poor stricken farmers, the salt of the earth (to quote a red-headed prince).

It’s always assumed that farmers have been hit by some unpredictable natural disaster beyond their control, the worst in years. They’ve all been hit hard, and so are desperately in need of our sympathy and support.

The trouble with this familiar, feel-good ritual is that it isn’t true. There’s nothing more predictable than that this drought will soon enough be followed by another, and one after that.

What’s more, though the Nats deny its existence, climate change means droughts are becoming more frequent and more severe, thanks to higher average temperatures – up about 1 degree since 1950 – and higher rates of evaporation.

It is possible for farmers to prepare for drought. And the truth is, most – yes, most – farmers have prepared, and as a consequence aren’t doing as badly as some. In their efforts to whip up our sympathy, the media give us an exaggerated impression of the drought’s severity, showing us the least-prepared farms rather than the best.

This matters because, as two economists from the Australian Bureau of Agricultural and Resource Economics and Sciences have written recently, “in our rush to help, we need to make sure well-meaning responses don’t do more harm than good”.

“Drought support could undermine farmer preparedness for future droughts and longer-term adaptation to climate change,” they say.

They argue that, to remain internationally competitive, our farmers need to increase their productivity, both by adopting improved technologies and management practices, and by shifting resources towards the most productive activities and the most efficient (that is, bigger) farmers.

“Supporting drought-affected farms has the potential to slow both these processes, weakening productivity growth,” they say.

Professor John Freebairn, of the University of Melbourne, notes that government drought assistance usually falls into three categories: income support for low-income farm families, subsidies for farm businesses and support for better decision-making.

The existing policy of making the equivalent of means-tested dole payments available to farmers is justified on social grounds.

But farm subsidies on loans, freight and fodder – all of which we’ve seen this time – can have unintended side effects. “Knowing that subsidies will be provided during drought . . . reduces the incentives for some farmers to adopt appropriate drought preparation and mitigation strategies,” Freebairn says.

By contrast, providing meteorological information on seasonal conditions, or hands-on education and support to individual farmers in developing more appropriate decision-making strategies, actually makes farming more robust and self-sufficient.

Suspending justified scepticism, at its best Morrison’s proposed drought future fund could go a step further and finance water infrastructure and drought resilience projects.

So, what can farmers do to make their farms more resilient to drought? Professor David Lindenmayer and Michelle Young, of the Fenner school of environment and society at the Australian National University, have plenty of ideas.

They say a key approach is to invest in improving the condition of natural assets on farms, such as shelter belts (tree lanes planted alongside paddocks), patches of remnant vegetation, farm dams and watercourses.

This increases the land’s resilience to drought, with collateral benefit to the health and wellbeing of farmers.

“When done well, active land management can help slow down or even reverse land degradation, improve biodiversity, and increase profitability,” they say.

Restored riverbank vegetation can improve dry matter production in nearby paddocks, leading to greater milk production in dairy herds and boosting farm income by up to 5 per cent.

Shelter belts can lower wind speeds and wind chill, boosting pasture production for livestock by up to 8 per cent, at the same time as providing habitat for animals and birds.

Their work with farmers in NSW who invested in their natural assets before or during the Millennium drought suggests these farmers are faring better in the present drought, they say.

“The need to invest in maintaining and improving our vegetation, water and soil has never been more apparent than it is now. We have a chance to determine the long-term future of much of Australia’s agricultural land.”

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Sensible electricity rules await the next government

You can call it populism or you can call it desperation. In the case of Scott Morrison’s recent problem-solving efforts, desperation fits better. And wouldn’t you be?

Morrison is probably right in concluding it’s too late in the piece to be worried about carefully considered, long-lasting solutions to the many problems contributing to his government’s unpopularity.

We’ll know soon enough whether his flailing efforts to apply quick fixes will be sufficient to secure his government another term in office.

But only after whichever side wins is facing a clear run of years before the next election will we see how our political class responds to the bipartisan – and world-wide – loss of faith in neoliberalism and its use of deregulation and privatisation to pursue the nirvana of Smaller Government.

Only then will it be clear whether flawed ideology has been replaced by unthinking populism as advocated by the shock jocks, or by a more realistic, more nuanced approach to intervention in markets that aren’t serving consumers well.

Meanwhile, Morrison has an election to avoid losing. If Tony Abbott hadn’t greatly compounded the problem by abolishing the carbon tax, you could feel a bit sorry for Morrison. The monumental stuff-up of the move to a national electricity market, with its price blowouts at every level – generation, transmission and distribution, and retail – was decades in the making.

Only with the doubling of retail prices over the past decade has realisation dawned that the federal government can’t escape ultimate political responsibility for a “national” market run by a squabbling committee of state and territory energy ministers.

But Morrison’s announcement last week of a desperate collection of good, bad and indifferent measures to get retail prices down in a hurry – or at least appear to be getting them down – seems no better than a crude attempt to bludgeon some quick retail price cuts out of the three oligopolists that have come to dominate the market.

As was powerfully demonstrated by the events leading to the overthrow of Malcolm Turnbull, no government whose members can’t agree that the threat of climate change is real is capable of achieving a policy regime that restores a stable future for the energy industry.

Don’t be fooled, however, by the industry apologists claiming the only real problem is the uncertainty about future governments imposing a price on carbon emissions, and the rises in the wholesale price this is now causing as coal-fired power stations die of old age without adequate replacement.

That relatively new problem accounts for little of the retail price doubling over the past decade – which is the underlying reason for the public’s anger over the cost of electricity.

Putting the blame on the inability of the two federal political sides to agree on a response to global warming sweeps under the carpet the oligopolists’ gaming of the wholesale market, the distribution industry’s gaming of its price-setting formula, and the blowout in retail margins following the state governments’ deregulation of retail prices.

Companies at the distribution and retail levels are earning rates of profit far higher than they need to cover their cost of capital and risk-bearing.

The public has every right to be up in arms, and the federal government every right to step into the mess in search of ways to reduce profitability and prices at the retail level. Particularly because what the feds would be doing is correcting years of misregulation by dysfunctional state governments.

It’s not a question of deregulation versus regulation. Electricity has always been more highly regulated than other industries and always will be. The national electricity market is, after all, a creation of government, which from day one has been (not very well) regulated by public authorities.

Rather, it’s a question of how and why you intervene to correct the mess. Whether you act carefully and reasonably to get the industry moving towards a future that’s sustainable financially and environmentally.

Any changes need to be fair, although in this the balance should err in favour of fairness to consumers (and business users) who’ve been overcharged for years. The industry can’t be allowed to use the trade union argument that their present rates of profitability are “hard-won gains” that must remain sacrosanct.

When something shouldn’t have been allowed to happen in the first place, it’s no crime to belatedly reverse it. Talk of “sovereign risk” is self-interested bulldust. You can’t have a democracy in which governments are forbidden to change course.

But none of this seems to describe Morrison’s motivations. He want price cuts, he wants them now, and he doesn’t much care what stick he waves to get them.

A word of free advice, Scott: claiming to have achieved bigger price cuts than the punters see in their quarterly bills will only make them angrier.

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Growth in world economy will take a toll on the environment

If the world’s population keeps growing, and the poor world’s living standards keep catching up with the rich world’s, how on earth will the environment cope with the huge increase in extraction, processing and disposal of material resources?

It’s a question many people wonder and worry about – without much sign it’s even crossed the mind of the world’s governments.

Until now. The Organisation for Economic Co-operation and Development is about to publish a Global Material Resources Outlook, which uses much fancy modelling to make an educated guess about what’s likely to happen in the future.

The report projects that, over the 50 years to 2060, annual global use of materials – including metals, fossil fuels, biomass (food and fibres) and non-metallic minerals (mainly sand, gravel, limestone and other building materials) – will more than double, from 79 gigatonnes in 2011 to 167 Gt in 2060. Gosh.

So how did the report reach that figure? It started by estimating the likely growth in the world’s population. Although its rate of growth is expected to slow, the world population could increase from 7 billion to 10 billion by 2060.

At the same time, material living standards in the developing countries are expected to continue converging on those of the developed countries.

Gross domestic product per person is expected to continue growing at a much faster rate in the poorer countries than the rich ones. So much so that, by 2060, the global level of real GDP per person is expected to have reached where it was for just the (richer) OECD countries in 2011.

This implies a tripling in global income per person to about $US40,000 a year – after adjusting for PPP, purchasing-power parity, to allow for one US dollar buying a lot more in a poor country than it does Stateside. The fastest catch-up will be in China and, to a lesser extent, India and south-east Asia.

That’s good news for the world’s non-rich. It would be a bit rich for the well-off countries to expect the poor countries to stay poor just to reduce pressure on the natural environment in a way we’re not prepared to.

Multiply world population by world income per person and you get world GDP. It’s expected to quadruple.

Even so, its rate of growth may slow. Whereas at the turn of the century world GDP was growing at an average rate of about 3.5 per cent a year, it’s expected to stabilise at a rate of less than 2.5 per cent well before we reach 2060.

(Why? Partly because of arithmetic. It’s much easier for a small number to grow by a high percentage than for a big number to. But also because, when you’re way behind, it’s relatively easy to catch up with the world’s technological frontrunner, the US, by adopting its better existing technology. Once you’ve done the easy bits, however, it gets harder to grow as fast. China will account for much of the global slowing.)

But hang on. If world GDP is expected to quadruple, how come materials use is expected only to double?

It’s because other things – helpful things – will be going on at the same time. The first is that the world economy is “dematerialising”.

Machines and gadgets are getting smaller and using less metal, but more to the point is the “servitisation” of the world economy (there’s a new ugly buzz word to add to your collection) – the tendency for more of each dollar we spend to go on services rather than goods.

Services have lower materials “intensity” – materials use per unit of output - than goods. The shift in the mix from goods to services is a function of economic development. When you’re poor the main thing you want is more goods, but as you get richer there’s a limit to how much you want to eat or wear and how many cars and TV sets you need. But there’s no limit to how many things you’d like to pay other people to do for you.

This shift is already well advanced in the rich countries, but the poor countries have a lot of infrastructure and housing to build (and a lot of cars and TV sets to buy) before they begin to approach material satiation.

The share of services in world GDP is projected to rise from 50 per cent to 54 per cent over the 50 years.

A second helpful factor is that technological advance should increase the efficiency with which materials are used. The two factors are projected to reduce the materials intensity of world GDP at the faster average rate of 1.3 per cent a year.

So, the report finds, were materials use to keep up with economic growth, annual use would increase by 283 Gt to 362 Gt. But the shift to services will reduce that increase by 111 Gt and technological advance will reduce it by 84 Gt, meaning materials use rises to just 167 Gt in 2060.

Note, however, that this is growth in “primary” materials extraction, not “secondary” use of recycled materials, which the report says is likely to become more competitive and grow at the same rate. So increased recycling is another factor helping to explain the lesser growth in primary extraction.

With GDP growing faster than materials use, the report is expecting a partial “decoupling” of the two.

Of course, there’ll still be a big increase in pollution. Greenhouse gas emissions, but also acidification, freshwater aquatic ecotoxicity, terrestrial ecotoxicity, human toxicity via inhalation or the food chain, photochemical oxidation (smog), ozone layer depletion, and not forgetting increased land fill to dump the materials when we’re done with ’em.

Final point: this “baseline scenario” assumes no change in government policy. That’s the point: it’s intended to show the world’s governments how great is the need for them to make a policy response.

Such as? I’d like to see a tax on materials use, with the proceeds used to reduce the tax on labour income. Similar to a price on carbon, this would do much to encourage recycling, repair and renovation, and economising in the use of materials.

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Tax reform is pushed by rich males, for rich males

I know it’s a shocking thing for an economics writer to confess, but I’ve lost my faith in the Search for the Golden Tax System. I no longer believe that reforming our tax system is the magic key to improving the nation’s economic and social wellbeing.

As we start to review the modest achievements of the Abbott-Turnbull-Morrison government over the past five years, business people, economists and accountants are lamenting its lack of progress on tax reform.

It raised expectations of sorely needed reform, then wilted at the first hint of political difficulty. The Rudd-Gillard-Rudd government did little better in its six years.

So, the zealots are telling us, the tax system remains unreformed, a millstone around our economy whose threat to our future becomes ever-more urgent. Every so often, one of the big four firms of chartered accountants comes up with its own plan to fix everything.

Sorry, not buying. It’s true our tax system is far from ideal, but if after decades of trying we’re still no closer to nirvana, it’s doubtful we ever will be.

Meanwhile, other aspects of the economy just as important to our present and future wellbeing, and just as in need of “reform”, languish while we obsess about taxes.

Such as? Education and training. Health. Cities with long commute times. “Sorry, we’ll get on to it as soon as we’ve increased the GST.”

The never-ending quest for tax reform is being promoted partly by econocrats, tax economists and tax accountants who specialise in the topic and have little to contribute on other issues.

But the biggest push is coming from rich white males in big business. Their goal is to “reform” the tax system so that they and their company pay less and others pay more. No matter how long it takes, they won’t “move on” until they’ve got what they want.

She didn’t put it this way, but the truth that tax “reform” has long been pushed by well-off men for their own benefit – and at the expense of less well-paid women – was demonstrated in a paper given at a tax conference last week by one of our leading tax economists, Professor Patricia Apps, of the University of Sydney Law School.

She showed how the Productivity Commission’s recent report finding there’d been no increase in inequality in recent decades rested on lumping couples’ incomes together, ignoring the difference in contributions by each partner and, in particularly, assuming that “home produced goods and services” - such as childcare, cooking or cleaning - make no contribution to the family’s standard of living, so can be ignored when they have to be bought in because both partners are working.

To be fair, the commission did its analysis the way it’s usually done. But that’s because such analysis is mainly done by men, to whom it never occurs to take account of home production.

Apps used samples of more than 2400 households from the official household expenditure surveys in 2004 and 2016 to divide their income between that contributed by the “primary earner” (mainly male) and the “secondary earner” (mainly female). Primary earners were aged between 20 and 60.

She found that over 12 years, the incomes of primary earners’ in the bottom decile (group of 10 per cent) rose by 53 per cent, increasing to a 78 per cent rise for those in the eighth decile and 124 per cent for the top decile. Look like rising inequality to you?

Then she estimated the income tax those primary earners paid, after adjusting for inflation. Comparing the last year with the first, those in the bottom decile got a real tax saving of $1450 a year, whereas those in the top decile got a saving of $12,340 a year.

So, high income earners benefited most. But get this: after the bottom decile the tax saving fell to a low of $200 for the fifth decile and $370 for the sixth. It then started rising slowly until it leapt for the top decile.

See what’s happened? Very low income earners have done OK, earners at the very top have done brilliantly, and people around the middle have got peanuts. Guess where the (mainly female) secondary earners are likely to be congregated?

Of course, the high income-earners keep telling us their tax rates need to be cut to encourage them to work harder. But Apps has calculated the workers’ “labour supply elasticity”. In effect, she finds it’s very elastic (price-sensitive) for part-timers, but quite inelastic for full-timers, particularly those who’re highly paid.

Looking at primary earners in the top decile, she found that, despite their huge pay rise over the 12 years, and their generous tax cuts, the average number of hours they were working was virtually unchanged.

The various tax changes we’ve had – which aren’t nearly enough to satisfy the tax reformers – have favoured (mainly male) high income-earners, without any sign it’s made them work more.

The people whose decisions about whether to leave the home to do paid work, or to move from part-time to full-time, are those most likely to be affected by the tax they have to pay, but are no better off and probably worse off.

No prize for guessing these are mainly women with children. All this is long known by true tax experts – but just as long ignored. Tax reform is a game for well-off men on the make. Wake me when the women take over.

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Not sure what the economy's up to? Nor are the experts

There are times when the rich world’s macro-economists think they’ve got everything figured, and times when they know they haven’t. The latter is where we are now, with the entire profession scratching its head and wondering what’s causing the economy to behave as it is.

The last time economists thought they had it tabbed was between the mid-1980s and the mid-2000s. The world economy was growing so smoothly they decided we’d entered the Great Moderation and began patting themselves on the back.

Always a bad sign. Next thing we knew the global financial crisis had arrived and with it the Great Recession.

But it’s now a decade since the start of that recession, and it’s clear the advanced economies aren’t back to anything like what they were – even, despite appearances, the American economy.

The problem has various symptoms, but it boils down to slow economic growth, which boils down further to much slower rates of productivity improvement than we’ve been used to. This is surprising when you consider how much digital disruption we’re seeing. Isn’t that aimed at improving productivity?

So why is it happening? That’s anybody’s guess. A host of possible explanations is being advanced and debated. It could be another decade before a new conventional wisdom emerges.

I’ve written before about the thesis that the digital revolution won’t boost productivity the way earlier waves of general-purpose technologies did, about the thesis of “secular stagnation” and yet another idea that the main trouble is decades of weak business investment.

But last week Dr Luci Ellis, a Reserve Bank assistant governor, offered her own thoughts on yet another possible piece in the jigsaw puzzle. Productivity is generated by firms, but Ellis notes that, both in Australia and abroad, the evidence suggests that levels of productivity vary widely between firms, even within the same narrowly defined industry.

“Firms that are highly productive – so-called superstar firms – tend to grow faster, grow employment faster, and pay better than firms that are a long way from the frontier of productivity”, she says.

But there’s a problem. Because these superstar firms are more productive than average, they gain market share at the expense of less-productive competitors.

The leading firms could start moving further and further ahead of the pack.

Those that lag behind would then find it harder and harder to catch up. The result could be that markets become more concentrated.

“The market leader begins to reap monopoly profits, which isn’t good for consumers and might not be good for long-run innovation and [society’s] welfare”, she says.

But must the laggard firms never catch up? That may depend on why so many firms are lagging. If it’s because they lack managerial ability, it ought to be possible for them to copy the leaders’ superior approach or even poach their rival’s managers. If so, this would lift the whole industry’s – and the nation’s – productivity.

But what if the laggards have lower productivity because they aren’t adopting the latest technology the way the superstars are? There’s evidence this is the case in other advanced economies, but Ellis says we don’t yet know if it’s true in Australia.

If this superstar pattern has arisen only recently, it could be something to do with the nature of developments in digital technology and their ease of adoption.

Previous waves of general-purpose technologies, such as electricity or the earlier round of computerisation, had the benefit of reducing the level of skill needed to operate them, whereas innovations such as machine learning and artificial intelligence seem to have a very different character, she says.

“Using machine learning and other emerging techniques to automate routine business processes seems to involve specialist skills and, often, PhD-level training in statistics or computer science. These skills are much rarer and take longer to develop than those required for the jobs that are thereby replaced.

“That doesn’t mean it’s impossible, but it could take a long time,” she says.

And get this: if leading-edge technologies are (at present, anyway) unusually costly or difficult to adopt, they become a kind of barrier to entry protecting the firms that are already using those technologies.

That would be a worry if lagging firms never caught up. And if incumbents never face rivals, they’re more likely to become complacent. “Innovation could slow down, and growth in living standards with it”, she concludes.

So, is this the big reason productivity improvement has slowed throughout the advanced economies? Far too soon to say.

But it makes an important point: the problem, and the solution, lie in the hands of our big companies.

Governments may have a role in spending more – and more wisely – on education and training, but giving up a lot of revenue to cut the rate of company tax isn’t likely to make much difference.

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Sorry, small business has no special sauce for jobs

Scott Morrison is surely on a winner with his decision to step up pursuit of jobs and growth by bringing forward the time when small and medium businesses have their company tax rate cut to 25 per cent.

Certainly, it’s likely to be a popular decision, not just with the owners of the more than 3 million businesses who’ll be paying a bit less tax, but also with a lot of ordinary voters.

After all, as everyone knows, small business is the backbone of the economy and its engine room. It’s where most of the economy’s jobs are.

How does everyone know it? Because that’s what politicians – and the small business lobby – keep telling us.

This is why Morrison is so confident of getting the bring-forward passed by the Senate.

Cutting the smaller-business company tax rate to 25 per cent by 2021-22 rather than 2026-27 will have an additional cost to revenue of $3.2 billion over four years.

Only about $1.3 billion of this would be offset by the government’s abandonment of its plan to cut the tax rate for bigger businesses. The rest would be covered by repaying government debt more slowly than previously projected.

There’s likely to be enough cross-benchers keen to push the fast-tracking through – big business may not be judged worthy of a tax cut, but smaller business is - even if Labor isn’t playing ball.

But it seems Labor will be. Why? Because it, too, professes to believe small business is what the economy revolves around.

According to its official policy: “Small businesses make a huge contribution to national prosperity and supporting Australian jobs. Small businesses play a central role in the economy.”

There’s just one problem with all this stuff. It ain’t true.

When you study the facts and figures, there’s no reason to believe small business has any economic virtue not possessed by businesses of any other size. If anything, the reverse.

I’ve spent my whole career as an economic journalist refuting the delusional claims of this or that part of the private sector to be more worthy than the rest of it.

If it’s not small business claiming to be the economy’s engine room, it’s farmers claiming to be the bedrock on which the rest of the economy is built, or manufacturing claiming that making things is more virtuous than doing things (providing services).

There are all those ads telling us it’s mining the country most depends on. (They’re trying to draw attention away from the truth that mining is hugely profitable, about 80 per cent foreign owned, avoids as much tax as possible and employs surprisingly few workers.)

Then there are the exporters claiming that producing things for sale to foreigners is more important than producing things for sale to locals.

Plus, of course, the common delusion that the private sector is “productive” whereas the public sector is unproductive and even parasitic. Do you really think curing the sick or teaching the young – or even directing the traffic – is unproductive? That people in the private sector pay taxes, but workers in the public sector don’t?

It’s all economically illiterate hype. And it’s used to try to justify demands that the government give my bit of the economy a special deal not available to other bits. Economists’ name for it is “rent-seeking”. (Though, as recent events remind us, no one does rent-seeking better than the Catholic schools.)

But back to measuring against the facts the claims that small business has a special sauce when it comes to jobs. It’s complicated by the fact that the usual way of measuring the size of businesses is according to the number of their employees, whereas eligibility for the lower company tax rate is determine by the size of a business’s turnover (sales, not profits).

Morrison says there are more than 3 million businesses with turnover of less than $50 million a year, employing “nearly 7 million Australians”.

If so, that’s more than half of our total “employed persons” of 12.6 million. But about a third of those 7 million would be in medium-size businesses, not small.

According to the latest figures from the Australian Bureau of Statistics, for 2016-17, small business (defined as firms with fewer than 20 employees) has 4.8 million workers, medium-size business (20 to 199 employees) has 2.6 million workers and large business (200 plus) has 3.5 million.

That means small business employs just 44 per cent of the private sector workforce and about 40 per cent of the total workforce.

But just because a sector employs a lot of workers, that doesn’t necessarily mean it's creating jobs faster than other sectors.

Over the two years to June 2017, small business may have had 44 per cent of the existing private sector jobs, but it accounted for only 18 per cent of the growth in jobs.

Overall, private sector employment grew by 2.3 per cent, but small business employment grew by just 0.9 per cent. Combine small and medium and they grew by 2.3 per cent, about the same rate large-business employment growth.

And this during a period when smaller businesses were paying a lower rate of tax, supposedly to encourage them to create more jobs.

Actually, the lack of apparent response shouldn’t be a surprise. The typical tax saving is small. Morrison himself says that an independent supermarket or a pub that makes a $500,000 annual profit would save $12,500 in 2021-22 “to invest back into the business or staff, or help to manage cash flow”.

That doesn’t buy many jobs, nor many pay rises. And since businesses are free to use their tax saving however they see fit, there’s no reason to think they’ll favour more jobs or higher wages. No more than big businesses would.

If Morrison’s on a winner, it’s a political winner, not an economic one.

But if there’s nothing special about small business, why do politicians on both sides keep spreading the sector’s propaganda that it is special?

Because the many more owners of small businesses have far more votes than the relatively few bosses of big businesses do. It's politics, not economics.

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