Saturday, April 6, 2019

Budget makes Frydenberg an unwitting Keynesian stimulator

Treasurer Josh Frydenberg doesn’t want anyone saying the budget he unveiled this week involves applying some “fiscal stimulus” to get the economy moving faster. He’d prefer to say his budget is “pro-growth”.

But what is fiscal stimulus? And does that label apply to this year’s budget? Only if you’re prepared to be called a “Keynesian” economist. Which Frydenberg isn’t.

Why not? Because in the hard right circles in which many Liberals move, the name of John Maynard Keynes (rhymes with Brains) has become a swearword. (That’s because their penchant for dividing people into political friends and foes exceeds their understanding of economics.)

The K-word isn’t one used a lot by the Reserve Bank. My guess is it would be quite pleased with what Frydenberg has done in coming up with his own version of what, when Kevin Rudd did it after the global financial crisis in 2008, was dubbed a “cash splash”.

But the Reserve would limit itself to saying Frydenberg has made the budget “less contractionary” than it would have been.

The “fiscal” in fiscal stimulus is just a flash word for anything to do with the budget. The managers of the macro economy often do things intended to stimulate it to grow faster, create more jobs and make us more prosperous.

In last year’s budget, Scott Morrison introduced a new “low and middle income tax offset” (known to aficionados as the lamington) worth $530 a year, to be received by workers earning between $48,000 and $90,000 a year, with those on lower or higher incomes getting lesser amounts, starting from last July.

The offset was equivalent to about $10 a week but, because it’s a “tax offset”, they don’t get it until they’ve submitted their annual tax return at the end of the financial year and received their tax refund cheque. That cheque (these days actually a transfer to their bank account) will include the offset.

So workers should receive their first offset payment as a lump sum sometime in the September quarter of this year.

But this week the government decided to increase the amount of the offset by $550 and to backdate it to last July. So about 4.5 million taxpayers will be given a cash grant of $1080 in a few months’ time. When they spend that money, it should give the economy a kick along.

First point to understand, however, is that though the motive for the policy changes politicians announce in budgets is usually political – they just want to buy our votes, for instance - that doesn’t stop those measures having an effect on the economy.

Economists ignore the political motivations and focus on the likely economic effects.

Second point, while it’s easy to see that something as sexy as a tax cut could, when it’s spent, add to economic activity, that’s just as true of the government's spending to build new infrastructure, or add new medicines to the pharmaceutical benefits scheme, or spend more on education.

So what will stimulate the economy is all the new programs the government decides to spend on, less any cuts in government spending or new tax increases it makes.

The budget papers show that, since the midyear budget update in December, the government’s decisions to change tax and spending programs total $5.7 billion, spread over the present financial year and the coming year.

That total stimulus is equivalent to about 0.3 per cent of gross domestic product – meaning that, despite all the excitement, it’s not exactly huge.

Third point, while most people see immediately that the things governments do with their budgets affect the economy, it takes them longer to realise that, particularly because the economy (GDP) is about four times bigger than the budget, the things the economy does also affect the budget.

That is, there’s a two-way relationship between the budget and the economy.

As the economy grows during the upswing of the business cycle, this should improve the budget balance, as the progressivity of the income tax scale (aka bracket creep) causes income tax collections to grow faster than income itself, and government spending on dole payments falls as more people find jobs.

Alternatively, as the economy slows during the downswing of the business cycle, tax collections also slow down and dole payments grow as people lose their jobs.

Keynesian economists refer to this source of improvement or deterioration in the budget balance as the “cyclical” component.

In contrast, they refer to the improvement or deterioration in the budget balance caused by the explicit decisions of the government to change taxes and government spending as the “structural” component.

Keynesians judge the “stance of policy” adopted in the budget by the change in this structural component. And, as we’ve seen, they’d judge the stance this year to be mildly stimulatory.

The Reserve – which needs to know what effect changes in the budget are having on the strength of demand in the economy so it can decide what it needs to do about interest rates – makes no distinction between the cyclical and structural components of the budget balance.

It simply looks at the direction and size of the expected change in the overall budget balance, which it calls the “fiscal impact”.

As well as seeing that the balance was expected to swing from deficit to surplus, it would note from the budget papers that, since the midyear budget update in December, tax collections and spending underruns were expected to improve the budget balance by $9.7 billion over the present and coming financial years.

In other words, the budget was now expected to take a further $9.7 billion more out of the economy than it put back in. Such a fiscal impact would be contractionary, not stimulatory.

But Frydenberg’s new spending and tax cut, costing $5.7 billion, will make the budget a bit less contractionary than it could have been. Good.
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Wednesday, April 3, 2019

Budget does the right thing for the wrong reason

Set aside the politics, focus on the economy's immediate needs, and this is a good budget – though, with less politics and more economics, it could have been better.

Viewed through a political lens, this is the classic budget of a government that knows it has only a slim chance of winning the looming election but also knows it has little to lose by abandoning its stated policies and promising more government spending and yet more tax cuts.

Add an economic perspective, however, and it's a budget that does the right thing for the wrong reason.

The Coalition won office almost six years ago promising to make eliminating "Labor's debt and deficit" its highest priority.

It's taken all this time to get to the point of being able to budget for a surplus next financial year, during which time the debt has doubled.

The rules it set itself said there were to be no tax cuts until the surplus was much higher than the one it's expecting. Any unexpected improvement in tax collections should be "banked" not spent. Only by running the biggest surpluses possible could the debt be paid off quickly.

All that is now out the window. But, whatever the government's ulterior motive, that's a good thing.

Why? Because, despite the decade that's passed since the global financial crisis – and the Treasurer's repetition of the mantra "a stronger economy" – the economy is still surprisingly weak. A year ago, it looked like it might be moving into top gear, but since then we have seen it fall back to grinding along in second.

That being so, now is not the time to have the budget taking a lot more money out of the economy than it's putting back in.

Although employment has been growing more strongly than you would expect, the economy's growth has remained below-par. It's being held back mainly by weak consumer spending, which is weak mainly because wages aren't increasing much – a phenomenon both sides of politics prefer to call "cost of living pressures".

Treasurer Josh Frydenberg predicts that wages will grow by 2.75 per cent in the coming financial year and by 3.25 per cent the following year. That's likely to prove over-optimistic, as such forecasts have been throughout the Coalition's term.

The tax cuts he is promising are a poor substitute for a decent pay rise, but they will help consumers keep spending and turning the wheels of the economy.

People earning between $925 and $1730 a week will get a tax cut equivalent to about $20 a week, backdated to July last year. But it will come in the form of an annual tax refund cheque after submitting their return in a few months time, that is $1080 higher than otherwise.

People earning less that $925 a week, or more than $1730 a week, will get much lower refunds.

Likewise, the one-off cash grants to pensioners are a poor substitute for a lasting solution to the problems in the electricity market, but they're better than nothing.

And the planned big increase in the government's spending on infrastructure will also help.

One little-noticed reason for us to be less impatient to pay off government debt is that the interest rate on long-term government bonds has fallen below 2 per cent. That's less than the rate of inflation.

The problem with Frydenberg's tax cuts is that though he keeps saying (and the media dutifully keep repeating) they are aimed at "low and middle income-earners", in truth, most of the money will go to people whose incomes are way above the middle.

By far the most expensive change to last year's seven-year tax cut plan – the change that does most to double the cost of the cuts to a staggering $302 billion over 10 years – is the decision to cut the middle tax rate from 32.5¢ in every dollar to 30¢ from July 2024.

The consequent saving will range from zero for those earning less than $925 a week to $75 a week for those earning $3845 a week and above.

These top earners don't have a pressing problem with the cost of living and are likely to save rather than recirculate a lot of their tax cut.

Had Frydenberg done more to direct his generosity to the really hard-pressed – including the unemployed, living it up on $40 a day – it would all have gone straight to retailers, big and small.

But the size and shape of the tax cuts we'll end up with are far from decided. The bidding war between the parties isn't over.

When the government announced the first stage of its tax cuts last year, it took Labor two days to up the ante by 75 per cent. The Treasurer has now doubled the government's original offer. In two days' time we will hear if Bill Shorten intends to see Frydenberg – or raise him.

The difference between the two sides is that whereas the Coalition's tax cuts come at the expense of slower progress in paying off the debt, Labor's plans involve cutting tax breaks in a way that takes from high-saving, higher income-earners and gives to low-saving, lower income-earners.

With an election coming in six weeks, you choose.
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Monday, April 1, 2019

The budget's getting better, but the economy's getting worse

Why would a government that boasts of its superior economic management be entering an election campaign with a budget warning of harder economic times ahead? Because it has no choice.

It will turn this admission of a bleaker economic outlook – with a slowdown in the global economy and, domestically, the risk that falling house prices could further weaken consumer spending – into a warning that now is just the wrong time to turn the economy over to those bunglers in the Labor Party, but this will be making the best of a bad deal.

There’s nothing new about a big give-away pre-election budget, but the budget we’ll see on Tuesday night will be different in several respects. For one thing, it’s not often you get a full budget that’s timed to be the kick-off of a six-week election campaign.

It will be more like an election policy speech than a budget, since none of its measures will have been legislated, let alone put into effect. Unless the Coalition wins, it’s a budget we’ll never hear of again.

For another thing, it’s reasonable to expect that strong economies and strong budgets go together, as do weak economies and weak budgets. The state of economy determines the state of the budget balance.

Not this time. As Deloitte Access Economics’ Chris Richardson has observed, “the economy is getting worse, but the budget is getting better”. Let’s start with the budget.

Politically, this budget is built on a fiction: that its centrepiece, a further round of tax cuts (and possibly one-off cash grants to pensioners) on top of last year’s three-stage, seven-year tax cuts costing $144 billion over 10 years, is the fruit of the government’s success in returning the budget to surplus, not a sign of its political desperation.

In truth, the government’s budgetary record is hardly anything to boast about, particularly when you remember the confident promises it made while in opposition about how quickly and easily it could eliminate “debt and deficit”.

The deficit may be gone, but there's still a lot of debt - which the Coalition seems in no hurry to pay back.

We know the government will budget for a decent surplus in the coming financial year, but it’s so close to balance in the present year that it would take only minor creative accounting to produce a “surprise” surplus a year earlier than promised.

When you remember how close to balance Labor’s Wayne Swan got in 2012-13, however, it’s surprising it’s taken the Coalition all of two terms to get us to where we now are.

You can blame this on lack of political will, but it’s now more apparent than it has been that the delay is a product of the economy’s slowness to recover from the Great Recession we supposedly didn’t have.

Even since Swan’s day, the econocrats – including the Reserve Bank – have each year been forecasting an early return to strong economic growth and a greatly improved budget balance.

And, each year, their forecasts have proved way too optimistic, particularly for a return to strong wage growth. A return to economic business as usual has repeatedly eluded us.

It’s not the econocrats’ fault, it’s the slowness of all of us to realise that the “secular stagnation” that’s dogged the United States and the other advanced economies is also dogging us. But with the economy’s unexpected slowing to growth of just 2.3 per cent over 2018 – or 0.7 per cent when you subtract population growth – it’s now a lot harder not to realise.

Few remember that Tony Abbott’s ill-fated first budget in 2014 was carefully designed to do little to reduce the budget deficit for the first three years because the economy was still too weak withstand a move to contractionary fiscal policy.

The surprising fact is, little has changed in all the years since then. This is the macro-economic justification for Tuesday’s purely politically motivated announcement of further tax cuts. The economy’s still too weak to withstand contractionary fiscal policy as the budget heads into surplusland.

But, in that case, how have we finally got back to surplus? Partly, through surprisingly limited real growth in government spending. But, mainly, through years of bracket creep, the exhaustion of companies’ prior tax losses, more effective anti-avoidance measures and, above all, the good luck of a (probably temporary) recovery in coal and iron ore prices and, thus, mining company profits.

Treasurer Josh Frydenberg will be hoping to convince us the budget improvement is lasting, but the weak economy is temporary. It’s more likely to be the other way round.
Read more >>

Saturday, March 30, 2019

High immigration hiding the economy's long-running weakness

How’s our economy been doing in the five or six years since the Coalition returned to office? In the United States and other advanced economies there’s much talk of “secular stagnation”, but that doesn’t apply to us, surely?

After all, we’re now into our record-setting 28th year of continuous economic growth since the severe recession of the early 1990s. This means that, unlike the others, we escaped the Great Recession that followed the global financial crisis in 2008.

Recent years have seen employment growing strongly and the unemployment rate falling slowly to 5 per cent. And, of course, as Treasurer Josh Frydenberg never fails to remind us when we see the quarterly national accounts, our economy is among the fastest growing of all the rich economies.

So the talk of secular (meaning long-lasting, rather than worldly) stagnation can’t be our problem, can it? Don’t be so sure.

The argument that, since the global crisis, the developed world has fallen into a period of weak growth that looks likely to last quite a few years was first advanced by one of America’s leading economists, Professor Laurence Summers, of Harvard, a former secretary of the US Treasury in the Clinton administration.

He took the term from its earlier use during the Depression of the 1930s, using it to mean “a prolonged period in which satisfactory growth can only be achieved by unsustainable financial conditions”.

The Economist magazine explains that secular stagnation means “the chronically weak growth that comes from having too few investment opportunities to absorb available savings”.

Let me tell you about some comparisons of our performance by decade, calculated by independent economist Saul Eslake in a chapter he contributed to the book, The Wages Crisis in Australia.

In the first eight years of the present decade, consumer spending – which typically accounts for just under 60 per cent of gross domestic product – has been slower than in any decade in the past 60 years.

The major reason for this is that the present decade has seen household disposable income grow at an average real rate of just 2.2 per cent a year, which is less than in any of the previous five decades.

The biggest component of household income is income from wages. Its real growth in the present decade has been slower than in any of the five preceding decades.

So, as I may have mentioned once or twice before, weaker growth in wages seems to be at the heart of weaker consumer spending growth and growth in the economy overall.

But the growth in consumer spending would have been even slower had households not reduced the proportion of their income that they saved rather than spent by 4 percentage points – to its lowest level since before the financial crisis.

The slow growth in wages in the present decade has meant a decline in the share of national income going to wages, which (along with higher mineral commodity prices) has contributed to the higher share of income going to the profits of corporations.

This “gross operating surplus” (which, Eslake says, is roughly equivalent to the sharemarket’s EBITDA – earnings before interest, tax, depreciation and amortisation) has averaged 26.7 per cent of GDP since 2000 – which is 3.5 percentage points more than it did in the 1980s and 1990s.

But this isn’t as good for business as it sounds. Eslake points out that, “while the share of the national-income pie going to corporate profits has increased, the pie itself has been growing at a much slower rate – so much so that the growth rate of corporate profits [as measured by gross operating surplus] has thus far during the current decade been slower than in any decade since the 1970s”.

Since it’s the rate of growth that share investors and business managers focus on, this says even business profits haven’t been doing wonderfully.

Which brings us to the national accounts’ bottom line – growth in real GDP. It’s averaged 2.7 per cent a year so far in this decade, which is less than in any decade since the 1930s.

And get this. More than half the real GDP growth so far this decade is directly attributable to growth in the population. Growth in real GDP per person has averaged 1.1 per cent a year – equal to its performance during the 1930s, and slower that anything we’ve had in between.

Get it? Allow for population growth – so you’re focusing on whether economic growth is actually leaving us better off on average – and our weak growth since the financial crisis becomes even weaker.

If our economic performance seems better than the other advanced economies’, that’s just because our population is growing much faster than theirs.

The symptoms of secular stagnation that other rich countries complain of are: weak growth in consumption and business investment, slow improvement in productivity, only small increases in wages and prices, and interest rates that are low not just because inflation is low, but also because real interest rates are low.

(The long-running slide in real long-term interest rates around the world demonstrates The Economist’s point that, globally, we’re saving more than households, businesses and governments want to borrow.)

We tick all those boxes. Unsurprisingly in our ever-more-connected world, we too are locked into secular stagnation of a seriousness not seen since the 1930s. It’s just that our rapid population growth – plus the ups and downs of the resources boom – has hidden it from us.

I remind you of all this today because it’s highly relevant to Tuesday’s federal budget: what it should be aiming to do, and how we should judge what it does do.
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Wednesday, March 27, 2019

Generational conflict comes to a polling place near you

The most memorable news photo I’ve seen in ages is one from the first School Strike 4 Climate late last year. It shows a young woman holding a sign: MESS WITH OUR CLIMATE & WE’LL MESS WITH YOUR PENSION.

One minute we oldies are berating the younger generation for their seeming lack of interest in politics (although, having arrived on the scene at a time when our politicians are behaving so badly, who could blame them?), the next we’re criticising them for missing a day of school.

When you remember how many days of uni the baby boomers missed with all their marches against the Vietnam war, the odd day off school hardly signifies. (Not that I’d want to discourage the ageing climate-change deniers from criticising the school-dodgers. When you’re growing up, defying adult authority is a big part of the motivation.)

Whenever I get the chance, I have a simple message for youngsters: you’d better start taking an interest in politics because it’s the people who aren’t watching that the pollies end up screwing.

The truth is our young people are interested in political issues, but that interest is unfashionably idealistic. They really care about fairness to the LGBTI community, climate change and the environment more broadly.

They’re not yet sufficiently old and cynical to have realised that politics has devolved into a self-centred free-for-all, where you jump into the ring to advance and protect your own interests at the expense of those with less muscle.

When last my colleague Jessica Irvine expressed support for Labor’s plan to end the refunding of unused dividend imputation credits to all except those receiving an age pension or part-pension, an angry reader accused her of “continuing to fuel the fire of inter-generational envy”.

Sorry, that argument doesn’t wash. It’s one the well-off and their champions have used for ages. What it’s really saying is, “it’s a sin for you to envy the fruits of my greed”.

When people accuse others of “the politics of envy” or inciting “class warfare”, their true message is: I’m winning, you’re losing, so why won’t you just accept it? Just be nice and stop trying to make things fairer.

(Speaking of sin, when last I supported the reform of imputation credits, a reader accused me of “preaching”. Sorry, when your father spent his life preaching two sermons a Sunday, it’s only to be expected. And I’m old enough to regard being likened to my father as a compliment, not an insult.)

Stripping away the religious overtones, there is, always has been and probably always will be plenty of scope for conflict between the generations. The solution is for the generation presently in power
to put its children’s interests ahead of its own (see climate change above).

Almost all of us do this in our private lives (it’s clear a lot of the well-off retired fighting to retain imputation credits are motivated by maximising their kids’ inheritance, and we’re happy for the bank of mum and dad to help our children into home-ownership), but when it comes to public policy we’re easily seduced by politicians seeking our votes with promises of short-term gain for long-term pain.

Not enough people realise that our system of taxes and benefits is explicitly designed to move money between the generations.

People – mainly younger people - with jobs and no kids pay a lot more in taxes (all taxes) than they get back in benefits (whether in cash or kind, such as education and healthcare), whereas families with kids get back a lot more than they pay. Couples whose kids have grown up but who are still working pay more than they get back, and then the retired get back a lot more than they pay.

Since almost all of us will progress through each of these stages, this money-shifting should pretty much even out over our lives. So, until relatively recently, it’s been seen as fair. It’s the basis for the oldies’ eternal sense of entitlement: “I’ve paid taxes all my life . . .”

But this has changed. As our leading independent think tank, the Grattan Institute, has demonstrated, tax changes over the past two decades have been “hugely generous” to older Australians.

“Older households pay $7500 [a year] less in income tax in real terms today than older households 20 years ago, despite high increases in average incomes,” it found. “Taxes on working-age households have risen over the same period.”

Most of this is explained by changes made by John Howard to benefit the alleged “self-funded retirees” (including making unused imputation credits refundable) and similar changes to superannuation tax breaks made by Peter Costello.

Add in Howard’s more favourable tax treatment of negatively geared property investments, and the young are dead right to believe the tax system has been biased against them and in favour of the better-off old (including me).

They’d also be right to see the looming federal election campaign as a battle between one side seeking to reduce the system’s bias against the young and the other fighting to protect the recently conferred perks of the well-off aged.

But a note to outraged Millennials: Howard is no baby boomer and the intended beneficiaries of his munificence were his own and earlier generations. Only some of the world’s evils were installed by my privileged generation.
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Monday, March 11, 2019

Economists: lonely, misunderstood angels in shining armour

If you’re tempted by the shocking thought that economists end up as handmaidens to the rich and powerful – as I’m tempted – Dr Martin Parkinson wishes to remind us that’s not how it’s supposed to be. The first mission of economists is to make this world a better world, he says. But don’t expect it to make you popular.

Let me tell you about a talk he gave on Friday night. It was a pep talk to the first of what’s hoped to be a regular social gathering for young economists come to Canberra to study, teach or work in government or consulting.

Apparently, working in Canberra can be a tough gig if you don’t know many economist mates to be assortative with.

Parkinson’s own career has had its downs and ups. He was sacked as Treasury secretary by Tony Abbott – who feared he actually believed in the climate change policy the Rudd government had him designing – then resurrected by Malcolm Turnbull as secretary of the Department of Prime Minister and Cabinet, the Treasury secretary’s bureaucratic boss.

He began the pep talk with a story about the woman with only six months to live, who’s advised by her doctor to marry an economist so as to make it seem like a lifetime.

That may be because, as Parko says, economists are trained to be analytical. To be rigorously logical and rational in their thinking. (I define an economist as someone who thinks their partner is the only irrational person in the economy.)

“Economics gives you insights into the way the world works that other professions cannot,” he says. Economists see things that others can’t. Sometimes that’s because the others have incentives not to see them.

As Upton Sinclair famously put it, it’s difficult to get someone to understand something when their salary depends on them not understanding it.

Ain’t that the truth. The endless bickering between our politicians explained in a single quote. And the economists’ limited success in persuading people to take their advice.

Economists are trained to see “opportunity cost” which, according to Parko, is “the core tenet of the profession”. “This under underlies everything we do.

“This leads us to positions that are often counter-intuitive [the opposite of common sense] and unpopular – but are right.”

True. It may amaze you that so much of what economists bang on about boils down to no more than yet another application of opportunity cost: be careful how you spend your money, because you can only spend it once.

It’s a pathetically obvious insight, but it’s part of the human condition to always be forgetting it. So it’s the economist’s role to be the one who keeps reminding us of the obvious. If economists do no more than that, they’ll have made an invaluable contribution to society – to making this world a better world - and earned their keep.

But here’s the bit I found most inspiring in Parko’s pep talk. “Economists are not ‘for capital’ or ‘for labour’ . . . We do not see the world through constructs of power or identity, even though we see the importance of them.

“We are ‘for’ individual wellbeing regardless of race, gender, sexual orientation or capabilities. Because of this, we are often against entrenched interests and for those without a seat at the decision table.

“Economists view the past as ‘sunk’ [there’s nothing you can do to change it] and argue for decisions about the future to be made free of sentiment and in opposition to special interests. Now, this is in sharp contrast to the incentives in our political system, which favour producer interests over that of consumers.”

Ah, that’s the point. The ethic of neo-classical economics is that the customer is king (or queen). Consumer interests come first, whereas “producer interests” (which include unions as well as business) matter only because they are a means to the ultimate end of the consumers’ greater good.

Economists believe in exposing business to intense competition, to keep prices no higher than costs (including a reasonable rate of return on capital) and profits no higher than necessary. Competition should spur innovation and technological advance, while ensuring the benefits flow through to customers rather staying with business.

Business doesn’t see it that way, of course. Unlike some, my policy is to tell business what it needs to know, not what it wants to hear. Some people – suffering from a touch of the Upton Sinclairs – tell themselves this makes me anti-business. No, it makes me pro-consumer. That’s the ethic we so often fall short of.
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Saturday, March 9, 2019

Forget what’s happening in the economy, just find a scary label

If you want the unvarnished truth, the economy’s rate of growth slowed surprisingly sharply in the second half of last year. If you prefer titillating silliness, we’ve entered a “per capita recession”.

The national accounts for the December quarter, issued by the Australian Bureau of Statistics this week, show real gross domestic product growing by only 0.2 per cent during the quarter, following growth of only 0.3 per cent in the September quarter.

That compares with growth in the first half of 2018 of 0.8 in the June quarter and 1.1 per cent in the March quarter. Six months ago, it looked like the economy was moving into top gear. Now we realise it was changing down.

You’d think that would be bad enough for those tireless in their search for bad news. But, no, they delved around in the fine print and discovered that real GDP per person actually fell by 0.2 per cent in the December quarter and by 0.2 per cent in the previous quarter.

So, that must mean we’re in a “GPD per capita recession”. Eureka! Much scarier. (And saying it in Latin rather than English makes it even more so.)

Making it more entertaining obscures the truth, of course, but you can’t have everything.

Speaking of truth, let me give you a tip: any “recession” that has to be qualified by an adjective ain’t the real deal.

The more excitable end of the economy-watchers – the financial markets and the media – is always looking for an excuse to shock mum by using the ultimate in economic bad language, the r-word. Over the years they’ve given us “technical” recessions, “manufacturing” recessions, “growth” recessions and now “per capita” recessions.

There is no science behind the notion that two successive quarters of “negative growth” – contraction – equal a God-given licence to use the r-word. It’s no more than a rule of thumb, whose one virtue is that it allows the over-excitable to shout Recession! within seconds of seeing a new set of figures, when they really should look and wait for more convincing information.

It’s no more than circumstantial evidence, when you can’t find the body or the murder weapon. No economist I know is comfortable with it as a way of judging whether we really are in recession.

What they know is that, as a test, it delivers too many false readings. Because it’s so arbitrary, it can tell you you’ve got a recession when you don’t, or tell you you don’t when you do.

The national accounts’ first stab at measuring the growth during a quarter is so rough and ready, and will be changed so many times before it stabilises, that two successive negative quarters can easily be revised out of existence.

The real world is too messy for such simple rules of thumb to be reliable.

Treasurer Josh Frydenberg tweeted that “in 2000 and 2006 the Howard government had consecutive quarters of negative GDP per capita growth, and Rudd and Gillard had five negative quarters”.

And all this while our record period of continuous economic growth – now up to 27 years – remained unbroken. See what I mean about false positives?

But even if you do use the successive-quarters test, you’re supposed to apply it to the whole economy, not just to the bit that happens to qualify.

That’s why Scott Morrison was justified in dismissing the “per capita recession” as “made-up statistics”. The figures may have been calculated by the bureau, but it didn’t say anything about recession. That notion was spread by the media.

The bureau calculates about eight different versions of GDP (page 21 of the release). The excitables ignored the six that didn’t show two successive minuses, and zeroed in on one of the two that did. It was a contrivance in search of a headline.

The various versions of GDP are calculated to answer different questions. GDP per person is not designed to tell us whether we’re in recession. It’s designed to show how much of the growth in the economy is coming just from population increase rather than rising prosperity.

Making it a useful indicator. For instance, Frydenberg boasted that “Australia continues to grow faster than all of the G7 nations except the United States”.

True, but GDP per person tells us why. It’s because our population’s growing so much faster than theirs. (Of course, if you’re looking for a job, the growth caused by a higher population should make it easier.)

Admittedly, GDP per person is often used as a measure of what’s happening to the standard of living. But it’s a terribly crude measure. Which is why economists agree that one of the other measures, “real net national disposable income per person”, is the best you’ll get just by modifying GDP itself.

Trouble is, it shows the income of households growing by 0.8 per cent in December and by 2.1 per cent over the year. Wouldn’t get a headline out of that.

Time for a reality check: why is it that the r-word strikes fear into the minds of ordinary people? Because they know that genuine recessions involve falling employment and rapidly rising unemployment. Businesses fail, people lose their jobs, and the rest of us fear we’ll be next.

Any sign of that happening? No. The reverse, in fact. Using the bureau’s “trend” (smoothed) figures, over the six months to December, employment increased by 175,000, with 87 per cent of the extra jobs being full-time, and the proportion of people aged 15 and over with jobs at a record 62.4 per cent.

The unemployment rate fell by 0.3 percentage points to 5.1 per cent and the under-employment rate fell 0.2 points 8.7 per cent.

That’s how terrible a per capita recession is.
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Wednesday, March 6, 2019

How to lose water, waste money and wreck the environment

If you want a salutary example of the taxpayers’ money that can be wasted and the harm that can be done when governments yield to the temptation to prop up declining – and, in this case, environmentally damaging – industries, look no further than Melbourne’s water supply.

The industry in question is the tiny native-forest logging industry in Victoria’s Central Highlands. The value it adds to national production of goods and services is a mere $12 million a year (using figures for 2013-14).

The industry's employment in the region was 430 to 660 people in 2012 – though it would be less than that by now. Few of those jobs would be permanent, with the rest being people working for contractors, who could be deployed elsewhere.

Successive state governments have kept the native-timber industry alive by undercharging it for logs taken from state forests. The state-owned logging company, VicForests, operates at a loss, which is hidden by grants from other parts of the government.

Coalition governments are urged to keep propping up the industry by the National Party; Labor governments by the Construction Forestry Maritime Mining and Energy Union.

What’s this got to do with Melbourne’s water supply? Ah, that’s the beauty of a case study by David Lindenmayer, Heather Keith, Michael Vardon, John Stein and Chris Taylor and others from the Australian National University’s Fenner School of Environment and Society.

I’ve written before in praise of the United Nations’ system of economic and environmental accounts (SEEA), which extends our long-standing way of measuring the economy (to reach gross domestic product) to include our use of natural resources and “ecosystem services” – the many benefits humans get from nature, such as photosynthesis.

Lindenmayer and co’s case study is one of the first to use the SEEA framework to join the dots between the economy (in this case, native forestry) and the environment (Melbourne’s water supply).

Melbourne’s population of 5 million is growing so rapidly it won’t be long before it overtakes Sydney as the nation’s largest city.

So many people require a lot of clean water, a need that can only grow. Almost all of Melbourne’s water comes from water catchments to the city’s north-east.

Logging of native forests has been banned in all those catchments except the biggest, the Thomson catchment, which holds about 59 per cent of Melbourne’s water storage.

Trouble is, the water that runs off native forests is significantly reduced by bushfires – and logging.

This is the consequence of an ecosystem service scientists call “evapo-transpiration” – the product of leaf transpiration and interception and soil evaporation losses.

This means the oldest forests produce the most water run-off. When old trees are lost through fire or logging, the regrowth that takes their place absorbs much more water.

Logging done many years ago can still reduce a forest’s water run-off yield today. The Fenner people calculate that past logging of the Thomson catchment has reduced its present water yield by 26 per cent, or more than 15,000 megalitres a year. They calculate that, should logging continue to 2050, this loss would increase to about 35,000 megalitres a year.

Assuming the average person uses 161 litres of water a day, the loss of water yield resulting from logging would have met the needs of nearly 600,000 people by 2050.

The SEEA-based case study shows the economic value of the water in all of Melbourne’s catchments is more than 25 times the economic value of the timber, woodchips and pulp produced from all Victoria’s native forests.

This is partly because, thanks to past fires and overcutting, only one-eighth of the native timber logged in Victoria is good enough for valuable sawlogs, with the remainder turned into low-value pulp and woodchips for making paper. (This is true even though the trees being logged include lovely mountain ash, alpine ash and shining gums.)

Turning to the Central Highlands alone, in 2013-14 the annual economic value of water supply to Melbourne was $310 million, about the same as the value of its agriculture. Its tourism was worth $260 million – all compared to its native timber production worth $12 million.

But the main thing to note is the trade-off between the different uses to which land can be put. Use it to produce water supply, and it’s very valuable. Use it to produce water supply and native timber, however, and you reduce the value of the water by far more than the chips and pulp are worth.

And why? To save a relative handful of workers the pain of moving to a different industry in a different town. And save the mill owners the expense of adapting their mills to chipping plantation wood rather than native wood. When did they deserve the kid-glove treatment the rest of us don’t get?

As for all the water that won’t be available to meet Melbourne’s growing needs, how will we replace it? Not to worry. We’ll get it from the desalination plant. It will cost $1650 more per megalitre than catchment water, but the Nats and the CFMMEU know we won’t mind paying through the nose to continue wrecking our native forests.
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Monday, March 4, 2019

Beware of groupthink on why the economy’s growth is so weak

According to our top econocrats, the underlying cause of the economy’s greatest vulnerability – weak real wage growth – is obvious: weak improvement in productivity. But I fear they’ve got that the wrong way round.

We all agree that, in a well-functioning economy, the growth in wage rates exceeds the rise in prices by a percentage point or two each year. On average over a few years, this “real” growth in wages is not inflationary, but is justified by the improvement in the productivity of the workers’ labour.

If this real growth in wages doesn’t happen, then real growth in gross domestic product will be chronically weak. That’s because consumer spending accounts for about 60 per cent of GDP.

Consumer spending is driven by household disposable income which, in turn, is driven mainly by wage growth.

We would get some growth in GDP, however, because our rate of population growth is so high. But look at growth per person, and you find it’s growing by only about 1 per cent a year.

It’s long been believed that real wages and productivity are kept in line by some underlying (but unexplained) equilibrating force built into the market economy.

Since the two have kept pretty much in line over the decades, few economists have doubted the existence of this magical force, nor wondered how it worked.

In America, however, real wages haven’t kept up with productivity improvement for the past 30 years or more.

And, as Reserve Bank governor Dr Philip Lowe acknowledged while appearing before a parliamentary committee recently, for the past five years nor have they in Australia.

Unlike the unions, which see the weakness in wage growth as the result of past industrial relations “reform” shifting the balance of wage-bargaining power too far in favour of employers, Lowe remains confident the problem is temporary rather than structural.

“Workers and firms right around the world feel like there’s more competition, and they feel more uncertain about the future because of technology and competition,” he said.

So, be patient. As the economy continues to grow and unemployment falls further, workers and their bosses will become more confident, wages will start growing faster than inflation and everything will be back to normal.

To be fair, Lowe is saying we have had “reasonable” productivity improvement over the past five years, which hasn’t been passed on to wages.

It would be better if productivity was stronger, of course, and “there’s been no shortage of reports giving . . . ideas of what could be done” to strengthen it.

But last week the newish chairman of the Productivity Commission, Michael Brennan, broke his public silence to give an exclusive statement to the Australian Financial Review.

“Productivity growth has been disappointing over the last few years in Australia, as it has been in many countries. There are no magic wands . . . but there are some clear remedies for Australia that should start with a focus on governments’ capacity to influence economic dynamism and productivity,” he said.

Oh, no, not that tired old line again. If wages aren’t growing satisfactorily, that’s because productivity isn’t improving satisfactorily, and the only way to improve productivity is for governments to instigate “more micro-economic reform”.

So, weak wage growth turns out to be the workers’ own fault. Their electoral opposition to “more micro reform” is making governments too afraid to do the thing that would raise their real wages.

We’ve become so used our econocrats’ neo-classical way of thinking that we don’t see its weaknesses.

It’s saying that, if the problem is weak demand, the cause must be weak supply, and the solution must be faster productivity improvement, which can be brought about only by “more micro reform”.

This ignores the alternative, more Keynesian way of analysing the problem: if the problem is weak demand, the obvious solution is to fix demand, not improve supply.

Since the global financial crisis, the developed countries, including us, have suffered a decade of exceptionally weak growth.

We’ve had weak consumer spending because of weak wage growth, the product of globalisation and skill-biased technological change, which has diverted much income to those with a lower propensity to consume.

With weak growth in consumer spending, there’s been little incentive to increase business investment rather than return capital to shareholders.

It’s this weakness in business investment spending that’s the most obvious explanation for weak productivity improvement.

That’s because it’s when businesses replace their equipment with the latest model that advances in technology are disseminated through the economy.

Our econocrats are like the drunk searching for his keys under the lamppost because that’s where the supply-side light shines brightest.
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Saturday, March 2, 2019

Who pays for Google and Facebook's free lunch?

There may be banks that are too big to be allowed to fail, but don’t fear that the behemoths of the digital revolution are too big to be regulated. It won’t be long before Google and Facebook cease to be laws unto themselves.

It’s the old story: the lawmakers always take a while to catch up with the innovators. But there are growing signs that governments around the developed world – particularly in Europe and Britain - are closing in on the digital giants.

And here in Australia, the Australian Competition and Consumer Commission is busy with the world’s most wide-ranging inquiry so far, which will report to the newly elected federal government in June. The commission’s boss, Rod Sims, gave a speech about it a few weeks ago, and another this week.

Sims says the commission’s purpose is “making markets work” by promoting competition and achieving well-informed consumers, so as to deliver good outcomes for consumers and the economy.

With this inquiry into the operations of “digital platforms”, he acknowledges that they have brought huge benefits to both our lives as individuals and our society more broadly.

“They are rightly regarded as impressive and successful, and very focused, commercial businesses. Google and Facebook are rapidly transforming the way consumers communicate, access news, and view advertising,” Sims says.

Each month, he says, about 19 million Australians use Google to search the internet, 17 million access Facebook, 17 million watch content on YouTube (owned by Google), and 11 million double tap on Instagram (owned by Facebook, along with WhatsApp).

The inquiry has satisfied itself that this huge size gives the two companies considerable “market power” – ability to influence the prices charged in certain markets.

“However,” Sims says, “being big is not a sin. Australian competition law does not prohibit a business from possessing substantial market power or using its efficiencies or skills to outperform its rivals.”

But the dominance of Google and Facebook does mean their behaviour should be scrutinised to see if it is harming competition or consumers.

To this end, the inquiry is focused on three potential areas of harm. First, the well-publicised issues of privacy and the collection and sale of users’ data.

Second, the digital platforms’ role in the advertising market, which is moving increasingly on line, where it’s estimated that 68¢ in every digital advertising dollar is going to Google (47¢) and Facebook (21¢).

And that’s not including classified advertising, the loss of which has been the biggest single blow to this august organ.

Sims says Google sells "search advertising", aimed at making an immediate sale, whereas Facebook sells "display advertising", aimed a making consumers aware of the product.

The pair sell ad space in their own right while also facilitating the advertising space sold by others, particularly the media companies. But the opacity of their algorithms and arrangements make it hard to know whether they favour their own ads over other people’s.

Advertisers say they don’t know what they’re paying for, where their ads are being displayed or to whom. This makes it harder for media companies to capture their share of advertising moving online.

Of course, higher costs for advertisers translate to higher prices for consumers.

Third is the digital platforms’ effect on the supply of news and journalism, the primary issue given to the inquiry.

Sims says newspapers and free-to-air radio and television are a classic example of a “two-sided market”. They serve consumers but, rather than charging them directly for the service as other businesses do, they cover their costs and profits by charging advertisers for access to their audience. (Newspaper subscriptions and cover prices accounted for only a fraction of their costs.)

Digital platforms aren’t just two-sided, they’re multi-sided. They, too, provide their services free, and charge advertisers, but also collect and sell to advertisers information about their users’ habits.

Google and Facebook select, curate, evaluate, rank, arrange and disseminate news stories. But they use stories created by others; they don’t create any news stories of their own. If they did, we could see this as no more than tough luck for the existing news media.

But as well as using the existing media’s stories to attract consumers and advertisers, about half the traffic on the Australian news media’s websites comes via Google and Facebook. So they have “a significant influence over what news and journalism Australians do and don’t see,” Sims says.

With the existing media having lost so much of its advertising revenue to the platforms, it’s not surprising they’ve had to get rid of at least a quarter of their journalists. There are a few new digital-only news outlets, but even they are having trouble making it pay.

Trouble is, news and journalism aren’t like most commercial products. They not only benefit the individual consumer, they benefit society as a whole. “Society clearly benefits from having citizens who are able to make well-informed economic, social and political decisions,” Sim says.

So news and journalism is a “public good” – if left to the profit-making private sector, not as much news and journalism will be supplied as is in the interests of society.

Public goods are usually paid for or subsidised by governments using taxpayers’ funds. If we want the benefits of Google and Facebook without losing the benefits of active, independent and challenging news media, taxpayers will have to help out.

Sims is canvassing several proposals before completing his final report. Since the former newspaper companies have realised they’ll never get much of a share of digital advertising, they’re now putting more hope in persuading their regular users to pay directly by buying subscriptions.

With the long-established attitude that everything on the internet should be free (or, at least, seem free), they’re finding it hard going.

That’s why I think Sims’ best suggestion is making personal subscriptions to the news media tax deductible, provided the outlet is bound by an acceptable code of conduct.
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Thursday, February 28, 2019

Top economy manager wants you to get bigger pay rises

This year more than usually, if you want straight talking about the state of the economy and its prospects, listen to the econocrats not the election-crazed politicians.

Late last week, Reserve Bank governor Dr Philip Lowe had more sensible things to say in three hours than we usually get in a month.

He was giving evidence to the House of Representatives standing committee on economics. For a start, he left little doubt about his disapproval of the way the two sides are turning the election campaign into a bidding war.

It’s clear the reason the election is being delayed until May is so Scott Morrison can use the April 2 budget to announce tax cuts in addition to the three-stage, $144 billion-over-10-years cuts he announced in last year’s budget.

He’s upping the ante not just because he’s behind in the polls, but also because Bill Shorten is promising to make the first-stage cuts about twice the size of Morrison’s. And big increases in spending on health and education.

Plus Shorten is claiming he’d have bigger budget surpluses. How? By reducing tax breaks used mainly by higher income-earners. The risk, however, is that Labor could get locked into cutting taxes and increasing spending, but not be able to get its revenue-raising measures through the Senate.

What would be worrying Lowe is that, just as we’ve come within sight of returning the budget to (tiny) surplus – but before we’ve made any progress in repaying the huge debt successive governments have racked up over the past decade – both sides have declared Mission Accomplished and started promising tax cuts galore.

Lowe said we should be running big budget surpluses and cutting back the debt as a sort of insurance policy against the next downturn in the economy – which he doesn’t see happening in the next year or two, but will happen one day.

Consider this. When the global financial crisis hit in October 2008, Lowe’s predecessor acted to protect us from the tsunami by cutting the official interest rate by 4 percentage points in about as many months.

Trouble is, we’ve since entered a low growth, low inflation world, and interest rates have remained low. The official interest rate is just 1.5 per cent. So the central bank has little scope to stimulate the economy the way it did last time.

In that case, the government should use its budget to stimulate the economy by splashing cash, spending on school playgrounds and the like.

See the problem? We won’t have much scope to do that, either, if we’ve been so busy awarding ourselves tax cuts that we’ve made little progress in reducing all the debt we’ll be starting with.

Moving on, Lowe said the economy’s two main worries were the weak growth in wages and falling house prices. But he stressed that wages and household income were far more significant than house prices.

If you were thinking it was the other way round, that may be because the media have misled you. “It’s largely the income story which doesn’t get talked about enough, because the media love talking about property prices,” he said.

Whereas household income, coming mainly from wages, used to grow by about 6 per cent a year (before allowing for inflation), in recent years it’s grown by less than 3 per cent.

Lowe didn’t say it, but what economists see as weak growth in wages, most ordinary mortals perceive as the worsening “cost of living” – which polling shows is now voters’ greatest concern.

People are having trouble balancing their own budgets, not because prices generally are soaring, but because their wages aren’t growing a per cent or two faster than prices, the way they used to.

Lowe is confident wages will gradually improve, but “if we have another five years where workers don’t get their normal share of productivity growth [that is, if wages don’t return to growing a per cent or so faster than prices each year], we’ll have all sorts of economic, social and political problems”.

Gosh. He did have some good news, however. He’s confident employment will continue growing strongly because the rate of job vacancies is higher than it’s ever been.

And whereas economists have long believed the rate of unemployment couldn’t fall below “about 5 per cent” before we started getting excessive wage settlements and rising inflation, Lowe now believes unemployment can fall further to “about 4.5 per cent” before there’s a problem. (May not sound much to you, but it gives us scope for 67,000 more jobs.)

Lowe says there’s more competition between the big banks than we’re told about. Remember a few months ago when they raised their mortgage interest rates by between 0.1 and 0.15 percentage points?

That’s what they told the media and what they wrote on their price lists. In truth, however, rates rose by only 0.03 or 0.04 points. Why? Because too many of their customers threatened to take their business elsewhere.

Finally, some free advice from the nation’s most powerful economist: “I encourage everyone who has a mortgage, if they haven’t done so recently, to go and ask their bank for a better deal. And if the bank says no, go look for another bank.”
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Monday, February 25, 2019

It’s not business-bashing, it’s the public’s moment of truth

With the federal election campaign being fought over which side will do the better job of re-regulating the banks, the energy companies and business generally, big business seems to be going through the stages of grief. It’s reached denial.

According to the Australian Financial Review, the Business Council of Australia is most put out that the Morrison government has yielded to pressure from Labor and some Nationals to support a bill making it easier for smaller businesses to take legal action against big businesses.

Apparently, Scott Morrison and his lieutenants had the temerity to make the decision without giving the council an opportunity for private lobbying.

Which would have been intend to avoid “harmful unintended consequences,” including any possible drag on the economy. Of course.

Apparently, it’s just another instance of the growing level of “business bashing” in this campaign.

Sorry, guys, you’ve got to have a better argument than that. Accusing your critics of business-bashing or teacher-bashing or bank-bashing is what you say when you haven’t got a defence and are succumbing to a persecution complex.

It makes you and your mates feel better, but that’s all.

It’s a refusal to accept any responsibility for the bad performance of which people are complaining. Since it’s entirely the fault of others – usually, the government – any attempt to make me and my mates bare our share of responsibility can be explained only by ignorance and malice.

Such denial offers big business no way forward. Much better to admit there’s a fair bit of truth to the criticisms and accept that your performance will have to be a lot better.

The Business Council needs to admit to itself that this is not some passing phase of populist madness, it’s the end of the line for the “bizonomics” that micro-economic reform degenerated into – the belief that what’s good for big business is good for the economy.

The simple truth is that, when you go for years abusing your market power, the electorate eventually wakes up and hits back, threatening to toss out any government that isn’t prepared to set things to rights.

Now the scales of economic fundamentalism have fallen from our eyes, who could doubt that big businesses use their superior power – including their ability to afford the best legal advice – to unreasonably impose their will on smaller businesses, just as they impose incomprehensible and utterly non-negotiable terms and conditions on their customers. Like it or lump it.

One of the greatest weaknesses of “perfect competition” – the oversimplified model of market behaviour that permeates the thinking of economists, both consciously and unconsciously – is its implicit assumption that the parties to economic transactions are of roughly equal bargaining power.

In the era of oligopoly, however – where so many markets are dominated by four or even two huge corporations - nothing could be further from the truth.

It’s thus perfectly reasonable for governments to intervene in markets to bolster the bargaining power of the smaller and weaker parties – whether employees permitted to bargain collectively and go on strike, small businesses helped to seek legal redress from much bigger businesses, or customers protected from misleading advertising, high-pressure selling and other abuses.

It’s because economists’ thinking is so deeply infected by their model’s unrealistic assumptions that they fell for the notion that merely providing consumers with more information on labels and in “product statements” (quickly sabotaged by being turned into pages of legalese) would protect them from exploitation.

Though oligopolies have existed for decades, economists have put remarkably little effort into studying how they work and, more particularly, how they can be regulated to ensure the economies of scale they have been designed to capture are passed through to their customers.

The trouble is that oligopolies do all they can to avoid competing on price.

A part of this is offering a range of products that are almost impossible to compare with other firms’ products.

In the complex, busy world we live in, it’s utterly unrealistic to expect ordinary consumers to devote hours of precious leisure time to checking to see whether their present provider of bank accounts, credit cards, mortgages, mobile phones, electricity, gas and even superannuation is quietly taking advantage of them.

This is the case for government regulation to impose standardised comparisons and default products, statutory guarantees, legal obligations to act in the client’s best interests, and much else.

The other thing we’ve learnt in recent times – from the banking inquiry and many other examples – is that if businesses large and small are confident they won’t get caught, there’s no certainty they’ll obey the law.
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Saturday, February 23, 2019

We've had plenty of new jobs - for the young, not so much

You can be sure Scott Morrison and Josh Frydenberg will be boasting about this week’s job figures, which show the jobs market remaining unusually strong. But their critics know not to believe the numbers.

The Australian Bureau of Statistics’ figures for January show the seasonally adjusted rate of unemployment steady at 5 per cent – the lowest it has been since the start of the decade. The more reliable “trend” (smoothed) estimate is little different at 5.1 per cent.

Sticking with the trend figures, employment has increased by more than 295,000 people over the past year. That’s a rise of 2.4 per cent – a lot bigger than the average annual growth rate over the past 20 years of 2 per cent.

Almost three-quarters of those extra jobs were full-time. Full-time employment has been growing particularly strongly in the past few years.

Another good indicator of how well the economy is going at providing jobs for those who want to work is the employment ratio – the proportion of everyone in the population aged 15 and over who has a job. It’s steady at 62.4 per cent, the highest it’s been.

Just during January, employment increased by 24,900 to reach 12.7 million. That’s an increase of 0.2 per cent, above the monthly average growth rate over the past 20 years of 0.16 per cent.

But don’t get the idea this means all of us stayed in our jobs while another 24,900 joined us. That’s just the net increase. There was a lot more coming and going than that. Indeed, the bureau informs us that, each month, about 300,000 people leave employment and about 300,000 enter it.

Looking at that strong performance over the past couple of years, what’s not to like? With a federal election coming up, why shouldn’t Morrison and Frydenberg boast about the great job they’ve done on jobs?

Well, a lot of their critics would be happy to tell you. They know the official unemployment figures understate the true extent of joblessness.

Did you realise, for instance, that the bureau counts you as employed even if you’ve worked for as little as one hour a week?

This means that, as well as the 680,000 people counted as being unemployed, there are another 1.1 million people who are under-employed – those who have a part-time job, but want to work more hours a week than they are.

Those 1.1 million represent 8.3 per cent of the “labour force” (all those with jobs or looking for jobs). Add that 8.3 per cent to the official unemployment rate and you get a total “labour under-utilisation rate” of 13.3 per cent.

This is down from 14 per cent a year ago, with under-employment accounting for just 0.2 percentage points of the fall and unemployment accounting for the rest.

So the under-employment rate, which rose in the years after the global financial crisis, has fallen since its peak of 8.8 per cent in early 2017, but much more slowly than the fall in unemployment.

That’s the standard critique of the official story: the “true” extent of joblessness is far higher than the official unemployment rate tells us, and when you take account of widespread under-employment you see also that the rate of improvement has been a lot smaller.

What are we to make of this criticism? Well, it’s correct factually, but when you look deeper you see it goes to the other extreme of overstating the extent of the problem.

Take, for instance, the oft-repeated news that people are counted as unemployed if they work for as little as an hour a week. That’s true, but how many people do work as little as an hour?

Answer: almost no one. This week the bureau issued a special note about this matter. It says that only about 14,500 people do, out of total workforce of 12.7 million – that is, 0.1 per cent. (If you think 14,500 people is a lot, you don't realise how big our economy is.)

Make it people working up to three hours a week and you’re still only up to 100,400 people, or 0.8 per cent. In fact, about 97 per cent of workers usually work seven hours or more a week. That’s at least one full shift a week.

The point is that you have to draw the dividing line between unemployed and employed somewhere, and by adhering to the longstanding international convention of drawing it at an hour a week, we are not significantly overstating the position.

Many people assume the only good job is one that’s full-time. Wrong. Many students, parents and semi-retired people are perfectly happy working only part-time.

Further, many people assume that every part-time worker who says they’d like to work more hours is someone who’d rather have a full-time job if only they could find one. That’s wrong, too. Though many would indeed prefer a full-time job, many part-timers want to stay part-time, but wouldn’t mind working a few extra hours.

So when you take the unemployment rate (people with no job) and simply add the under-employment rate of 8.3 per cent on to it, you’re exaggerating the number of people working significantly fewer hours than they want to.

But let’s take a closer look at under-employment. As the bureau has explained, it is concentrated among the young. More than a third of the under-employed are aged 15 to 24. About 18 per cent of all workers in this age group are under-employed.

It seems clear that education-leavers have borne more than their fair share of the pain during the period of below-par growth since the global financial crisis in 2008. Many people leaving university have had to settle for a part-time job and, until quite recently, they’ve taken more months to make it into full-time employment.

The latest figures from the universities show their new graduates are now taking less time to find a decent job than they were.

But, in any case, caring about the troubles of young people is deeply unfashionable. It’s the well-off elderly we should be worrying about.
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Wednesday, February 20, 2019

If only the Indigenous had the worries of the well-off aged

One thing I hate about elections is the way politicians on both sides seek to advance their careers by appealing to our own self-centredness. I suppose when they know how little we respect them for their principles, they think bribing us is all that’s left.

The federal election campaign hasn’t started officially, but already the one issue to arouse any passion is the spectacle of the most well-off among our retired screaming to high heaven over the proposal that, though granted the concession of paying no tax on income from superannuation, they should no longer receive tax refunds as though they were paying it.

We teach our children to respect the needs and feelings of others, and to take turns with their toys, but when it comes to politics you just get in there and fight for as much lolly as you can grab. And if my voice is louder and elbows sharper than yours, tough luck.

When someone at one of those rallies of the righteous retired had the bad manners to suggest that the saving would be used to increase spending on health and education (and increase the tax cut going to those middle-income families still required to pay tax on their incomes) they were howled down. Health and education? Don’t ask me to pay.

You gave me this unbelievably good tax deal, I paid the experts to rearrange my share portfolio so as to fully exploit it, and now you tell me you’ve discovered you can’t afford it and other people’s needs take priority. It so unfair.

Meanwhile, at the other end of the income spectrum, Scott Morrison delivered a Closing the Gap report to Parliament last Thursday. It was the 11th report since the practice began, following Kevin Rudd’s National Apology in 2008.

Morrison was the fifth prime minister to have delivered the report. The fifth obliged to admit how little progress has been made in achieving the seven targets we set ourselves.

The original targets were to halve the gap in child mortality by 2018, to have 95 per cent of all Indigenous four-year-olds enrolled in early childhood education by 2025, to close the gap in school attendance by 2018, to halve the gap in reading and numeracy by 2018, to halve the gap in year 12 attainment by 2020, to halve the gap in employment by 2018, and to close the gap in life expectancy by 2031.

As you see, four of the seven targets expired last year. None of them was achieved. They’re being replaced by updated – and more realistic – targets.

In his progress report, Morrison was able to say only that two out of the seven targets were on track to be met.

The first of these is the goal of having 95 per cent of Indigenous children in early childhood education by 2025. This was achieved in the latest figures, for 2017, with NSW, Victoria, South Australia, Western Australia and the ACT now at 95 per cent or more.

The other is halving the gap in year 12 attainment by 2020. Morrison says this is the area of biggest improvement, with the Indigenous proportion jumping by 18 percentage points since 2006.

With the key target of life expectancy, the figures show some improvement for Indigenous people from birth, but associate professor Nicholas Biddle, of the Centre for Aboriginal Economic Policy Research at the Australian National University, warns that the figures are dodgy.

So why have we been doing so badly? Biddle and a colleague argue that the original targets were so ambitious they couldn’t have been achieved without radically different policies, not the business-as-usual policies that transpired.

That’s one way to put it. It’s common for politicians to announce grand targets that make a splash on the day, without wondering too hard about how or whether their successors will achieve them. And no one was more prone to such “hubris” (Morrison’s word) than Kevin07.

A second reason, they say, is that successive governments’ policy actions haven’t always matched their stated policy goals. Their employment target, for instance, hasn’t been helped by the present government’s abolition of its key Indigenous job creation program, the community development employment project.

Then there’s the present government’s soft-target approach to limiting the growth in government spending, which has involved repeated cuts to the Indigenous affairs budget, particularly in Tony Abbott’s first budget.

The most significant Indigenous policy initiative in ages, the Northern Territory Intervention – which preceded Closing the Gap, but has been continued by governments of both colours – may have directly widened health and school attendance gaps.

As well as disempowering Aboriginal people in the territory, the immense amount of money and policy attention devoted to the Intervention “could have been better spent elsewhere”.

Third, they say, measures intended to achieve the targets have rarely been subject to careful evaluation and adjustment.

Morrison professes to have learnt these lessons. But, the authors say, if his “refreshed” approach “does not put resources – and the power to direct them – into Indigenous hands, the prospects for closing socio-economic gaps are likely to remain distant”.
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Monday, February 18, 2019

Having stuffed-up deregulation, don't stuff-up re-regulation

As the banking royal commission finishes, the aged care royal commission begins investigating the mistreatment of old people by – taking a wild guess – mainly the for-profit providers. Surely it won’t be long before the politicians, responding to the public’s shock and outrage, are swearing to really toughen up the regulation of aged care facilities.

It’s not hard to see we’ve passed the point of “peak deregulation” and governments will now be busy responding to the electorate’s demands for tighter regulation of an ever-growing list of industries found to have abused the trust of economic reformers past.

But having gone for several decades under-regulating many industries and employers, there’s a high risk we’ll now swing to the opposite extreme of over-regulation. That could happen if politicians simply respond to populist pressures to wield the big stick against greedy business people.

It could happen if politicians yield to one of the great temptations of our spin-doctoring age: caring more about being seen to be acting decisively than whether those actions actually do much good.

And it could happen if our econocrats refuse to admit the shortcomings of their earlier advocacy of deregulation – including their naive confidence that the power of market forces would ensure businesses treated their customers well – and go into a sulk, washing their hands of responsibility for what happens next.

But against all those risks that, in seeking to correct the failures of the previous regime we introduce something that’s just as bad only different, there’s one cause for optimism: as the first cab off the re-regulatory rank, Commissioner Kenneth Hayne’s guiding principles for turning things around. (To be fair, those principles seem to have been influenced by Treasury’s submission to the commission.)

His first principle is that, since almost all the misconduct he uncovered was already unlawful, there’s no need for a raft of legislation to make them doubly illegal. The problem is more getting people to obey the existing law.

Blindingly obvious? Not to a politician who wants to be seen by an angry but uncomprehending public to be acting immediately and decisively. On the rare occasions when Australia is touched by a terrorist act, we see Parliament recalled to pass urgent legislation making terrorism quintuplely illegal.

Hayne’s second principle is that compliance will be increased by making the law simpler, rather than more complex, so no one can be in any doubt about what’s required of them.

The more complex and voluminous you make the law, the more scope you give well-resourced offenders to pay lawyers to find loopholes and argue the toss and string out court proceedings. In the process, increasing the cost to taxpayers of bringing them to justice, increasing the likelihood of them getting off and increasing the reluctance of the regulators to take them on in the first place.

Hayne says the whole body of law needs to be rewritten to simplify and clarify the legislators’ intentions. In the meantime, however, some changes should be made more quickly.

One is to get rid of exceptions, carve-outs and qualifications. Examples are the “grandfathering” (leaving existing arrangements unaffected by new rules) of certain commissions, and the exclusion of funeral insurance from rules affecting other insurance.

As two law professors from the University of Melbourne have pointed out, the rule of law requires like cases to be treated alike. To make exceptions you need powerful arguments – which haven’t been made.

“Instead,” they say, “exceptions and carve-outs reflect the lobbying of powerful industry groups concerned to preserve their own self-interest.” True. There’s no principle of deregulation that says it’s OK to look after your mates.

In highlighting the shortcomings of existing legislation, Hayne stressed that “where possible, conflicts of interest and conflicts between duty and interest [such as not acting in the best interests of your client] should be removed”.

But his final guiding principle is that existing laws must be enforced. “Too often, financial services entities that broke the law were not properly held to account. Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished,” he said.

Just so. And it raises a mode of response to the electorate’s wider discontents, as governments set out on the path of “re-regulating” industries other than financial services: regulations may need improving, but we don’t need a lot more of them.

No, what we need a lot more of is regulators doing – and being seen to be doing – their job of enforcing existing regulations with vigour and effectiveness, and governments being unstinting in providing them with resources.
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Saturday, February 16, 2019

Back to the future: Keynes can lift us out of stagnation

Every so often the economies of the developed world malfunction, behaving in ways the economists’ theory says they shouldn’t. Economists fall to arguing among themselves about the causes of the breakdown and what should be done. We’re in such a period now.

It’s called “secular stagnation” and it’s characterised by weak growth – in the economy, in consumer spending, in business investment and in productivity improvement. This is accompanied by low price inflation and wage growth, and low real interest rates.

Let me warn you: the last time the advanced economies went haywire, it took the world’s economists about a decade to decide why their policies of managing the macro economy were no longer working and to reach consensus around a new policy approach.

That was in the mid-1970s, when the first OPEC oil-price shock brought to a head the problem of “stagflation” – high unemployment combined with high inflation – a problem the prevailing Keynesian orthodoxy said you couldn’t have.

The Keynesians’ “Phillips curve” said unemployment and inflation were logical opposites. If you had a lot of one, you wouldn’t have much of the other.

The developed world’s econocrats lost faith in Keynesianism and flirted with Milton Friedman’s “monetarism” – which was just a tarted-up version of the “neo-classical” orthodoxy that had prevailed until the Great Depression of the 1930s.

That was the previous time the economics profession fell to arguing among itself. Why? Because neo-classical economics said the Depression couldn’t happen, and had no solution to the slump bar the (counter-productive) notion that governments should balance their budgets.

It was John Maynard Keynes who, in his book The General Theory, published in 1936, explained what was wrong with neo-classical macro-economics, explained how the Depression had happened and advocated a solution: if the private sector wasn’t generating sufficient demand, the government should take its place by borrowing and spending.

In the period after World War II, almost all economists – and econocrats – became Keynesians. Until the advent of stagflation.

Notice a pattern? We start out with neo-classical thinking, then dump it for Keynesianism when it can’t explain the Depression. Then, when Keynesianism can’t explain stagflation, we dump it and revert to neo-classicism.

Enter Dr Mike Keating, a former top econocrat, who thinks the present crisis of stagnation means it’s time to dump neo-classicism and revert to Keynesianism.

Why do economists have rival theories and keep flipping between them? Because neither theory can explain every development in the economy, but both contain large elements of truth.

So it’s not so much a question of which theory is right, more a question of which is best at explaining and solving our present problem, as opposed to our last big problem.

I think there’s much to be said for this more eclectic, horses-for-courses approach. There’s no one right model. Rather, economists have a host of different models in their toolbox, and should pull out of the box the model that best fits the particular problem they’re dealing with.

And much is to be said for Keating’s argument that we need a different economic strategy to help us into the 21st century. Got a problem with stagnation? The tradesman you need to call is Keynes.

Although the rich economies are in a lot better shape than they were during the Depression – mainly because, in the global financial crisis of 2008, governments knew to apply Keynesian stimulus - Keating sees similarities between the two periods of economic and economists’ dysfunction.

In this context, the key difference between the rival theories is their differing approaches to supply and demand.

Neo-classical economics assumes the action is always on the supply side. Something called Say’s Law tells us supply creates its own demand, so get supply right and demand will look after itself.

The modern incarnation of this is “the three Ps”. In the end, economic growth is determined by the economy’s potential capacity to produce goods and services, and our “potential” growth rate is determined by the growth in population, participation and productivity improvement (with the last being the most important).

By contrast, Keynesianism is about fixing the problem Say’s Law says we can never have: deficient demand. Insufficient demand was what kept us trapped in the Depression. Keating argues the fundamental cause of our present stagnation is deficient demand, and the solution is to get demand moving again.

Back in the stagflation of the 1970s, however, the problem wasn’t deficient demand. It was the supply side of the economy’s inability to produce all the goods and services people were demanding, thus generating much inflation pressure.

After realising that Friedman’s targeting of the money supply didn’t work, the rich world’s eventual solution to the problem was what we in Australia called “micro-economic reform” – reduced protection and government regulation of industries, so as to increase competition within industries and spur greater productive efficiency and productivity improvement, thus increasing our rate of “potential” growth.

Keating – who, with another bloke of the same name, played a big part in making those early reforms – insists they worked well and left us with a more flexible, less inflation-prone economy. True.

By now, however, assuming you can fix a problem of deficient demand by chasing greater competition and improved productivity just shows you haven’t understood the deeper causes of the problem.

But when Keating advocates a new economic strategy of demand management, he doesn’t just mean governments borrowing and spending a lot of money now to give demand a short-term boost.

He mainly means a new kind of micro reform that, by increasing the income going to those likely to spend a higher proportion of it, and by lifting our education and training performance to help workers cope with new technology, ensures demand strengthens and stays strong in the years to come.
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Wednesday, February 13, 2019

We could be among the world's climate change winners

In the dim distant past, politicians got themselves elected by showing us a Vision of Australia’s future that was brighter and more alluring than their opponent’s.

These days the pollies prefer a more negative approach, pointing to the daunting problems we face and warning that, in such uncertain times, switching to the other guy would be far too risky.

We’ve gone from “I’m much better than him” to “if you think I’m bad, he’d be worse”. Maybe they simply lack any vision of the future beyond advancing their own careers.

Management-types tell us we should conduct “SWOT analysis” – considering our strengths and weaknesses, opportunities and threats. But we’ve become mesmerised by the threats and incapable of seeing the opportunities. Such a pessimistic mindset is crippling us when we could be going from strength to strength.

Take climate change. It, of course, is a threat – to our climate, and hence to our comfort and our economy – but think a bit more about it and you realise that, for a country like ours, it’s also a new gravy train we could be climbing aboard.

The stumbling block is that responding to climate change requires change – and no one likes change, especially those who earn their living from the present way of doing things.

So, what more natural reaction than to resist change? Economists are always warning politicians not to try “picking winners”. In reality, they’re far more likely to resist change by spending lots of money trying to prop up losers.

Start by denying that change is necessary. Global warming isn’t happening, it’s just a conspiracy by scientists angling for more research funds.

Nothing new about heatwaves, bushfires, droughts, floods and cyclones – they’ve always existed. They’re becoming bigger and more frequent? Just your imagination.

What you’re not imagining is the ever-higher cost of electricity. But that’s just because those ideologues imposed a carbon tax and are making us subsidise renewable energy. Get rid of the taxes and subsidies and the cost falls back to what it was.

And those terrible wind turbines. They’re unnatural and unsightly, they kill rare birds and their noise endangers farmers’ health.

Renewable energy is unreliable because it depends on the wind blowing or the sun shining. You need coal for steady supply. With the greater reliance on renewables, where do you think the blackouts are coming from?

And renewable energy is so expensive. Coal-fired electricity is much cheaper. Plus, we’ve got all our chips stacked on coal. We’re world experts at open-cut coal mining. Our coal is much higher quality than most other countries'.

Coal provides jobs for 30,000 workers. There are towns desperate for jobs who’d just love another coal mine. And, of course, we’ve still got huge reserves of the stuff that’s of no value if it stays in the ground.

Some of these claims have always been untrue, some are no longer true and some are less true than they were.

Just this week, for instance, a report from the independent Grattan Institute has debunked the claim that “outages” are being caused by renewables, saying more than 97 per cent of outage hours can be traced to problems with the local poles and wires that transport power to businesses and homes.

While it’s true that power from existing coal-fired generators is dirt cheap, many of these are old and close to the end of their useful lives. They’re not being replaced by new coal generators because there’s too much risk that the demand for coal-fired power will dry up before the generators have returned the money invested in them.

The latest report from the CSIRO says the lowest-cost power from a newly built facility is now produced by solar and wind.

The cost of solar, battery storage and, to a lesser extent, wind power, has fallen dramatically over this decade, partly because of advances in technology but mainly because of economies of scale as China and many other countries jump on the bandwagon. These falls are likely to continue.

This has gone so far that the old arguments about the need for a price on carbon and subsidies for renewables are being overtaken by events.

Installation of renewable generation is proceeding apace, with all renewables’ share of generation in the national electricity market jumping from 16 per cent to 21 per cent, just over the year to December, according to Green Energy Markets.

So, as the economist Professor Frank Jotzo, of the Australian National University, has said, coal is on the way out. The only question is how soon it happens.

According to our present way of looking at it, this is disastrous news. But not if we see it as more an opportunity than a threat.

Professor Ross Garnaut, of the University of Melbourne, has said that “nowhere in the developed world are solar and wind resources together so abundant as in the west-facing coasts and peninsulas of southern Australia.

“Play our cards right, and Australia’s exceptionally rich endowment per person in renewable energy resources makes us a low-cost location for energy supply in a low-carbon world economy.

“That would make us the economically rational location within the developed world of a high proportion of energy-intensive processing and manufacturing activity.”
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Monday, February 11, 2019

Politicians, economists will decide if bank misbehaviour stops

In the wake of the Hayne report on financial misconduct, many are asking whether the banks have really learned their lesson, whether their culture will change and how long it will take. Sorry, that’s just the smaller half of the problem.

You can’t answer those questions until you know whether the politicians and their economic advisers have learned their lesson and whether their culture will change.

Why? Because the game won’t change unless the banks believe it has changed, and that will depend on whether governments (of both colours) and their regulators keep saying and doing things that remind the banks and others on the financial-sector gravy train that the behaviour of the past will no longer go undetected and unpunished.

One of Commissioner Hayne’s most significant findings was that almost all the misbehaviour he uncovered was already illegal. Which raises an obvious query: in that case, why did so much of it happen?

Hayne’s answer was “greed”. That’s true enough, but doesn’t tell us much. Greed has been part of the human condition since before we descended from the trees. But greed has been channelled and held in check by other factors – particularly by social norms that disapprove of it and find ways to censure people who aggrandise themselves are the expense of others. In old times, social ostracism was enough.

So, since banks and other financial outfits haven’t always been willing to exploit their customers the way they have recent decades, the question is: what changed?

One explanation is that the economy’s become a bigger, more complex, more impersonal place, where the exploiter and the exploited don’t know each other. Where the exploitation is carried out by four of the biggest, most sprawling and intricate computer systems in the country.

Where I can spend my obscenely large pay cheque without seeing the faces of the people I’ve ripped off flashing before my eyes. Indeed, in my suburb, all of us get huge pay cheques. And I don’t feel guilty; some of them get much bigger cheques than me.

But another part of the explanation must surely be that things started changing after the triumph of “economic rationalism”, the introduction of microeconomic reform, and the deregulation of the financial sector in the second half of the 1980s.

In the highly regulated world, there was less scope and less incentive to mistreat customers. Competition was limited and there was little innovation. Deregulation was intended to spur competition between the banks and give customers a better deal.

I’m not saying bank deregulation was a bad idea. It did bring innovation (we forget that banking and bill-paying are infinitely more convenient than they were) and you no longer have to live in a good suburb to get a loan from a bank.

And the banks do compete far more fiercely than they used to. It's just that they compete not on price (as the reformers assumed they would) but on market share and which of the big four achieves the biggest profit increase.

In this they’ve behaved just as you’d expect oligopolists to behave.

In the meantime, economic rationalism sanctified greed (the “invisible hand” tells us the market leaves us better off because of the greed of the butcher and the baker) and economists invented euphemisms such as “self-interest” and “the profit motive”.

Then, after economists got the bright idea of using bonuses and share options to align management’s interests with shareholders’, big business elevated “shareholder value” to being companies' sole statutory obligation.

Now, however, when Hayne says the banks gave priority to sales and profits over their customers’ interests, everyone’s rolling around in horror.

And politicians and econocrats are feigning surprise that financial regulators, long given a nod and wink to dispense only “light” regulation of the players (and denied the funding to give them any hope of successful prosecutions), did just as they were told.

Unless the econocrats and their political masters are willing to accept the naivety that marred bank deregulation, the harm ultimately done to bank customers – ranging from petty theft to life-changing loss – and the system’s susceptibility to political corruption, the banks’ culture won’t change because the will to change it won't last.

The existing prohibitions on mistreatment of customers need to be made more effective, as proposed by Hayne but, above all, the law needs to be policed with vigour – including adequately resourced court proceedings – so the banks realise they have no choice but to change.
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