Monday, December 23, 2019

Living in the post-inflation era turns out to be no fun

It’s Christmas shopping time, when the bills mount up and your money never goes far enough. So how come people are saying the inflation rate should be higher? I thought inflation was meant to be a bad thing?

It’s a good question when one of those people is Reserve Bank governor Dr Philip Lowe. He keeps saying we need to get unemployment lower and inflation back up into the 2 to 3 per cent target range. (At last count the annual rate of increase in consumer prices was "only" 1.7 per cent. I can remember when, for a brief period in the 1970s, it was 17 per cent.)

The short answer is that Lowe doesn’t see higher prices as a good thing in themselves. Rather, he sees them as a means to an end. Or better, as a symptom or by-product of something that is a good thing.

Why do prices rise? Because the demand for goods and services – the desire to purchase them – is growing faster than the supply of them – our businesses’ ability to produce them. So the rate of price inflation is a symptom or sign of strong demand.

And strong demand for goods and services is a good thing because it means the economy is growing and so is employers’ need for workers to help produce more goods and services. Employment increases and unemployment falls.

So Lowe wants to see higher prices simply because they’re a means to the end of lower unemployment. What’s more, increased employer demand for labour relative to its supply makes labour – particularly skilled labour – scarcer and so puts upward pressure on its price, otherwise known as wages.

And, as he’s often said, Lowe would like to see employers paying higher wages than they are, because consumer spending – consumer demand – is so weak at present mainly because wages are hardly growing faster than consumer prices, and real wages are the main thing that drives consumer spending.

All that make sense? Good – because now I’ll give you the more complicated answer. Surely, although strong demand is good for the economy, it would be better if supply was just as strong, meaning we could have growth in jobs and living standards without any inflation?

That makes sense in principle, but not in practice. The managers of the macro economy believe we need some inflation, though not too much. For two reasons. First, though you’ll find this hard to credit, economists are sure our consumer price index (like other countries’ CPIs) overstates inflation.

That’s because the official statisticians are unable to pick up all the cases where prices rise not simply because the firm’s costs have risen, but because the quality of the product has been improved. If so, aiming for a measured inflation rate of zero would require you to crunch the economy hard enough to make actual inflation less than zero – that is, prices would be falling.

The second reason is that sometimes, when the economy is growing too strongly, wages rise too much, prompting firms to lay off workers. Trouble is, workers hate having their wages cut. But if you’ve got a bit of inflation in the system, you can cut wages in real terms simply by skipping an annual pay rise, which workers find less unpalatable.

When the Reserve Bank set its target for inflation in the early 1990s, it settled on 2 to 3 per cent a year ("on average over the medium term"). It thought such a range would overcome both problems and insisted such a target range constituted "practical price stability".

But things in our economy and all the advanced economies have changed a lot since the 1990s. Demand has been chronically weak relative to supply since the global financial crisis and, in consequence, inflation rates have been below-target everywhere.

Some people have suggested we move to a lower, more realistic target range, but Lowe has resisted, arguing that to do so would lower firms’ and workers’ expectations about inflation, making our weak-demand problem even worse. He may be right.

But now try this thought. Inflation is 1.7 per a year, while wages are growing by 2.2 per cent and workers aren’t at all happy. I’ve had several top economists agree with my contention that, if we could wave a magic wand and raise both inflation and wages by, say, 2 percentage points, so that wages were growing by 4.2 per cent, workers would be a lot less discontented.

Why? Because of a phenomenon that economists used to talk about a lot in in the 1960s, but rarely mention today, called "money illusion". People who aren’t economists keep forgetting to allow for inflation. If so, the era of very low inflation isn’t proving to be much fun.
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Saturday, December 21, 2019

Don’t bank on budget surpluses this year or in future

This week’s mid-year budget update has changed the fiscal outlook markedly. It’s now a lot clearer that neither in this financial year nor those following is a budget surplus assured.

Whether he knows it or not, by staking so much of his political and economic credibility on getting back to surpluses, Scott Morrison has taken an enormous gamble. When the reality of this “courageous decision, minister” finally gets through to him, I won’t be surprised to see him perform a backflip to go down in history.

Since the election of the Coalition in 2013, there’s been a great debate about the causes of our economy’s continuing sub-par performance. While some economists have argued its roots lie mainly in changes to the structure of the economy (and thus lasting), the econocrats have insisted the causes are cyclical and thus temporary.

So Treasury and the Reserve Bank have gone on, budget update after budget after budget update, predicting that, although the latest indicators show the economy remaining sub-par, it will soon return to the trend growth we were used to before the global financial crisis.

Until now. The mid-year update represents the first stage in the econocrats’ quiet shift from cyclical to structural as the predominant cause of the economy’s weakness. And the first hint it was on its way came in late November, when Reserve Bank deputy governor Dr Guy Debelle pronounced that annual wage rises of between 2 and 3 per cent were “the new normal”.

By far the most significant revisions to the budget forecasts were made to annual growth in the wage price index. With the actual for last financial year coming in at 2.3 per cent rather than 2.5 per cent, the prediction for this year was cut by 0.25 percentage points to 2.5 per cent. The following three years were cut by 0.75 points to 2.5 per cent, by 0.75 points to 2.75, and by 0.5 points to 3 per cent.

This would be the main factor explaining why, after consumer spending grew by just 1.2 per cent over the year to September, the forecasts for consumer spending were cut by 1 percentage point to 1.75 per cent for this financial year, and by 0.5 points to 2.5 per cent for next year.

Despite offsetting changes to other components of gross domestic product, these major downward revisions to wages and consumer spending do most to explain why the forecast for real GDP growth for this financial year was cut by 0.5 percentage points to 2.25 per cent – but nothing to explain why growth the following year was kept unchanged at 2.75 per cent (but see below).

The major cuts to wages and consumer spending forecasts do most to explain why, after just eight months, the government’s been obliged to slash the budget’s estimate of tax collections and other revenue over the budget year and the three “forward estimates” years by a total of – amazingly — $33 billion.

Partly offsetting this, however, are its net cuts in estimated government spending over the four years of $11.5 billion. How is this possible when, in the time since the budget, the government has announced additional spending of $8.2 billion over the period on drought support, aged care and accelerated spending on infrastructure?

It’s possible because the lower predicted growth in wages and inflation will save the budget money on indexed welfare payments and, more particularly, because the fall in long-term interest rates will save it big money on interest payments on the net public debt. An expected gross saving on the spending side of $19.7 billion.

See what a difference less optimistic forecasts for the economy make to the budget?

Slashing revenue estimates by $33 billion, less the net saving on spending of $11.5 billion, means the expected budget surpluses over the four years have been slashed by $21.5 billion, from $45 billion to $23.5 billion. The expected budget surpluses have almost halved in the space of eight months.

This means the expected surplus for this financial year has been cut to $5 billion, or just 0.3 per cent of annual nominal GDP. Do you see how, in a budget worth $500 billion, such a small sum could disappear with just the smallest overestimate of revenue or underestimate of spending?

It’s the same for the revised predictions for surpluses in the following years: $6 billion (0.3 per cent of GDP), $8 billion (0.4 per cent) and $4 billion (0.2 per cent).

As former top econocrat Dr Mike Keating has argued, with no fall in unemployment expected until a modest improvement in 2021-22, the revised forecasts offer no convincing reason why annual wage growth will recover from its present rate of 2.2 per cent to a projected 2.75 per cent in 2021-22 and 3 per cent the year after.

Amazingly, the budget update papers imply this will happen because the budget’s projection methodology requires it to. Same with the return to (pre-crisis) trend GDP growth of 2.75 per cent next financial year. (This is a sign the econocrats have some way to go in fully accepting that structural changes will stop us ever returning to the “old normal”.)

But just as hard to believe as the out-year growth projections is the budget’s assumption that, having so far succeeded in limiting average real growth in government spending to 1.8 per cent a year, the government will now limit it to 1.3 per cent a year over the next four years.

As Keating has noted (and peak welfare group ACOSS’s Dr Peter Davidson before him), this implies real government spending per person will actually be falling.

Unsurprisingly, the Parliamentary Budget Office has warned it’s hard to believe such a degree of restraint could be maintained over such a long time.

Even Morrison’s secret weapon, aka hollow log – the budget’s highly conservative assumption on future world iron ore prices – rests on a gamble that iron ore prices will remain abnormally high. It would be so much less risky just to have some fiscal stimulus.
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Wednesday, December 18, 2019

Orana to Christmas, summer and the chance to go bush

Out on the plains the brolgas are dancing
Lifting their feet like war horses prancing
Up to the sun the woodlarks go winging
Faint in the dawn light echoes their singing
Orana! Orana! Orana to Christmas Day

To me one of the nicest bits of Christmas is a chance to sing the Australian carols of the old ABC’s William G. James, including Carol of the Birds. Orana, by the way, means welcome.

I don’t like to boast, but one of my achievements this year was to see a brolga. Several, in fact. Flying rather than dancing but, even so, one to cross off my bucket list. I’ve also seen jabirus, magpie geese, comb-crested jacana, osprey, white-bellied sea eagles, red-tailed black cockatoos and crocodiles, fresh and salty.

I’ve also seen Timorese ponies, Asian buffalo and – more surprising – Indonesian banteng cattle. By now the banteng are endangered in Indonesia, but going strong in northern Australia.

All during a 12-day tour of Arnhem Land, bouncing along unsealed roads in a truck converted to a bus, to visit remote Aboriginal communities (complete with permits) and cave paintings. An unforgettable experience, one moneyed Baby Boomers should consider before they jet off on yet another exploration of other people’s homelands.

Actually, I sometimes wonder whether the day is coming when – because of the damage it does to the atmosphere – we will look back with amazement and envy on the relatively brief golden age when flying for tourism was not only permitted but dirt cheap, so we roamed the globe whenever we could get away.

It’s a terrible thought. Let’s hope it never happens, thanks to some technological advance in aircraft fuel. But while it lasts, let’s not forget what a privileged generation we are.

But what of ecotourism? Is it as virtuous as we wilderness wanderers like to imagine, or will the new age puritans put the kybosh on that, too?

Well, I’ve been checking what the academic experts are saying – courtesy of my second-favourite website, The Conversation – and, though you can find the killjoys if you look, I think ecotourism gets a qualified tick.

It’s true that, in an ideal world, we’d all stay at home admiring nature from afar and insisting the politicians keep the outback – and other continents’ backblocks – locked up and in pristine condition. Where damage had already been done, we’d happily pay high taxes to compensate farmers, miners and tour operators for closing their businesses, and to restore the land to its former state.

No, not going to happen. Those who live in far-flung parts aren’t going to renounce the material ambitions that drive the rest of us. They’ll continue finding ways to make a buck. If so, ecotourism – whatever its downsides – will do a lot less harm than many other ways for bushies to earn a living.

Dr Guy Castley and two other researchers at Griffith University find ecotourism can contribute to conservation or adversely affect wildlife, or both. Attitudes of local communities towards wildlife influence whether they support or oppose poaching. Income from ecotourism may be used for conservation and local community development, but not always.

But for seven of the nine threatened species they studied – the great green macaw in Costa Rica, Egyptian vultures in Spain, hoolock gibbons in India, penguins, wild dogs and cheetahs in Africa, and golden lion tamarins in Brazil – ecotourism provided net conservation gains.

This was achieved through establishing private conservation reserves, restoring habitat or by reducing habitat damage. Removing feral predators, increasing anti-poaching patrols, captive breeding and supplementary feeding also helped.

For orang-utans in Sumatra, however, small-scale ecotourism couldn’t overcome the negative effects of logging. And for New Zealand’s sea lions, ecotourism only compounded the effects of intensive fishing because it increased the number of pups dying as a result of direct disturbance at sites where the sea lions came ashore.

Michele Barnes and Sarah Sutcliffe, of James Cook University, studied the effect of a shark education and conservation tour off the coast of Oahu, Hawaii. Sharks are crucial to our marine ecosystems, yet many shark populations are in decline because of fishing (particularly for shark-fin soup), fisheries bycatch, habitat destruction, and climate change.

Sharks have a PR problem. They are feared by many, demonised by the evil media, treated as human-hunting monsters, and cast as the villains in blockbuster movies. In many places, governments cull sharks in the name of beachgoers’ safety.

The researchers found that the program gave participants significantly more knowledge of the ecological role of sharks and a more favourable attitude towards them. It also had a significantly positive effect on people’s intentions to engage in shark conservation behaviour. This remained true even after allowing for the participants’ greater initial positive attitudes towards sharks than the public generally.

Even when not off somewhere exotic, my family almost always ends up holidaying in or near some national park. But what about all the damage done to parks to accommodate the needs of tourists?

Dr Susan Moore, of Murdoch University, and others from Southern Cross University, argue sensibly that parks need visitors to get vital community and political support.

“We need people in parks because people vote and parks don’t,” they say. “Strong advocacy from park visitors for environmentally friendly experiences, like wildlife viewing, photography, hiking, swimming, canoeing and camping, can counterbalance pressures for environmentally destructive activities such as hunting and grazing.” Amen to that.
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Monday, December 16, 2019

Letting things get worse so we're well placed to fix them later

If you've been feeling the pinch of a massive mortgage and minuscule pay rises and resolving to keep your spending tight this Christmas, Scott Morrison has good news. You will be relieved to hear the federal budget is still on track to reach a surplus this financial year and stay in surplus as far as the accountants' eyes can see.

Although many economists have been panicking over the economy's weak state – and the panickers were joined this week by the International Monetary Fund – Morrison is sticking to his resolve to keep his foot on the budget brake rather than move it to the accelerator.

This, his Treasurer Josh Frydenberg assured us in the mid-year budget review, will bring great
economic benefits, providing "the stability and certainty that households and businesses need to
plan for the future, giving them confidence to spend and invest knowing that the government can
keep taxes low and guarantee funding for essential services".

Hasn't worked so far, but it's bound to kick in soon.

Admittedly the economy's growth is weaker than he predicted it would be before the election in
May, so Frydenberg has had to cut the expected surplus this financial year by $2 billion to $5 billion (not all that much in a $500 billion budget) and by $5 billion next year.

This is mainly because the government has been obliged to abandon the confident prediction it has been making throughout its time in office that wage growth would soon return to something much healthier.

The bad news from the update is that Frydenberg is not expecting pay rises to average as much as 3 per cent a year until the second half of 2022 at the earliest.

But if that makes you fear the budget may not stay in surplus for long, Morrison has more good news. Much of the budget's recent strength despite a slowing economy is explained by the huge taxes our mining companies will be paying because a mining disaster in Brazil has pushed the world price of iron ore way up.

The trick is they've built themselves a hollow log. The budget's figuring is based on the assumption that the iron ore price collapses to $US55 a tonne. Should that not happen, Morrison can use the difference to prop up his budget if the panickers are right and the economy stays weak rather than speeding up, as he's sure it will.

On a separate matter, remember the Future Fund, set up in the early years of the resources boom when the Howard government was running budget surpluses so big they were embarrassing? According to Frydenberg's latest figuring, the income from all the shares the fund's money was invested in will account for most of the budget surpluses the government is expecting to run.

Now that's the "responsible fiscal management" we have come to expect of the Coalition. And it must surely comfort you to know that, should the worst come to the worst, the government will be well placed to launch a few life boats. On a user-pays basis, of course.
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Your antidote to Frydenberg’s budget-update talking points

At a time when the Prime Minister is refusing to accept that our weak economy needs a boost rather than a drag from the budget, stand by for loads of look-over-there spin from his unfortunate Treasurer Josh Frydenberg when he unveils the mid-year budget update today.

That was Frydenberg’s way of bluffing his way round the news earlier this month that the economy had grown by a disappointing 1.7 per cent over the year to September. So it wouldn’t be surprising to see some of those talking points get another run today.

He started with the line that, despite a result that laughed at his forecasts made only eight months earlier, the economy remains “remarkably resilient in the face of significant global and domestic economic headwinds”.

That’s a spin doctor’s way of saying “it could have been even worse”. Arithmetically true, but cold comfort. Since Frydenberg is boasting about our strong growth in exports, it’s hard to see much evidence of the global headwinds he claims are holding us back. And the domestic headwinds we’re suffering are home-grown and all too evidently a sign of poor economic management.

But Josh has more: “While other major developed economies like Germany, the United Kingdom, South Korea and Singapore have experienced negative economic growth, the Australian economy is in its 29th consecutive year of economic growth.”

Yes, but at present almost all our growth is coming from high immigration-fed population growth, not rising prosperity. As AMP Capital’s Dr Shane Oliver has noted, our annual growth in gross domestic product per person is just 0.2 per cent, compared with America’s 1.4 per cent, Japan’s 1.6 per cent and even the Eurozone’s 1 per cent.

In the first of his look-over-there arguments, Frydenberg boasts that we’ve maintained our AAA credit rating from three leading US rating agencies. Since these agencies’ lapse in ethical standards contributed significantly to the global financial crisis, this isn’t a recommendation I’d be skiting about. Any government that lets those disreputable characters dictate its budget policy lacks the courage of its convictions.

Next, we’ve seen our current account on the balance of payments “return to surplus for the first time in more than 40 years”. Not sure whether this boast is a sign of our Treasurer’s economic illiteracy, or his assessment of ours. Only the same people who think now’s a good time for the budget to take more out of the economy than it puts back – that is, return to surplus – would be foolish enough to think a current account surplus was a sign of economic strength.

It’s actually a sign that business investment is so unusually weak that our households, companies and governments are saving more than is needed to fund our national investment in new productive assets. Our usual current account deficit would be a much better sign of strong investment in future expansion.

Then we’re told that “welfare dependency is at its lowest level in 30 years”. With the unemployment rate at 5.3 per cent and the under-employment rate at 8.5 per cent, that’s not because they’ve all got jobs, it’s because of the government’s greater use of excuses to cut people off the dole and make them reliant on charity for their survival. Talk about reversion to the mean.

In a breathtaking case of Orwell’s Newspeak, Frydenberg claimed “growth has been broad-based with household consumption, public final demand and net exports all contributing to GDP growth”.

This is the very opposite of the truth. Since growth in consumer spending was a negligible 0.1 per cent during the quarter, the vast private sector of the economy actually went backwards, with what little growth we got coming from the much smaller (and despised) public sector and from net exports.

Growth in the September quarter was weaker than expected because Frydenberg’s repeated assurances that his middle-income tax offset would boost consumer spending failed to happen. Talk about chutzpah. He changed his line to “whether spent or saved, the tax cuts are putting households in a stronger economic position, making them more financially secure with more money in their pockets” without a blush.

Finally, it’s the drought’s fault – and you surely can’t blame the government for that. “Farm GDP is 5.9 per cent lower through the year to the September quarter and falling in four of the past five quarters. Rural exports fell by 2.8 per cent in the quarter,” Frydenberg said.

Arithmetically correct, but calculated to mislead. What he hopes you won’t remember is that, these days, agriculture accounts for only about 2 per cent of GDP, meaning the drought shaved only 0.1 percentage points off growth in the quarter, and 0.2 points over the year.

All this is the balderdash we get when pollies give politics priority over policy.
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Saturday, December 14, 2019

Why the government's forecasts are always way off

Just to warm you up for the mid-year budget update on Monday, let me ask you: why do you think Treasury and the Reserve Bank have gone for a least the past eight years forecasting more growth in the economy than ever transpired?

Kieran Davies, a respected economist from National Australia Bank, has been checking. He says their mistake has been failing to allow for the decline in our “potential” growth rate since the global financial crisis in 2008.

Actually, Davies has checked only the Reserve’s forecasting record, not Treasury’s. But the two outfits use similar forecasting methods and use a Joint Economic Forecasting Group to ensure their forecasts are never very different.

An economy’s “potential” growth rate is the average rate at which its capacity to produce goods and services is growing each year. This is determined by the average rate at which the Three Ps are growing – population, participation (in the labour force) and productivity (output per unit of input).

Sometimes (as now) the economy’s annual demand for goods and services doesn’t grow as fast as its potential to supply those goods and services is growing. This creates an “output gap” of idle production capacity, including unemployed and under-employed workers.

When demand picks up, the economy can grow faster than its potential growth rate for a few years until the idle capacity is fully taken up and the output gap has disappeared. Once that’s happened, the potential growth rate sets the speed limit for how fast the economy can grow. If demand’s allowed to grow faster than supply, all you get is inflation.

We know from the fine print in the budget papers that Treasury’s estimate of our present potential growth rate is 2.75 per cent a year. You can be sure the Reserve’s estimate is the same. This is often referred to as the economy’s forward-looking “trend” (medium-term average) rate of growth.

Treasury’s projections of growth over the rest of the next 10 years are based on the assumption that, once the economy has returned to its trend rate of 2.75 per cent, it will then grow by 3 per cent a year for several years until the idle capacity is used up, when it will revert to 2.75 per cent. (This projection of perfection is what allows the budget papers to include an incredible graph showing the budget surplus going on forever and the government’s net public debt plunging to zero by June 2030.)

Now, here’s the trick. Because the Treasury and Reserve forecasters have no more knowledge of what the future holds than you or I do, they rely heavily on a long-established statistical regularity called “reversion to the mean”. That is, if at present the variable you’re forecasting is above its average performance, the greatest likelihood is that it will move down towards the average. If it’s below average, it’s likely to move up towards the average.

So now you know why, for at least the past eight years, Treasury has forecast that, though growth in the economy is weak at present, within a year or two it will return to trend, and then go higher. When it turns out that didn’t come to pass this time, it’s still the best bet for next year. Fail and repeat. Although the Reserve revises its forecasts every quarter, it follows the same method.

Davies’ examination of the Reserve’s forecasting record found that, since the financial crisis, it had persistently overestimated growth in real gross domestic product in the year ahead, and had nearly always overestimated growth over the next two years.

Why? Because it failed to take account of the decline in the potential growth rate since the crisis. It’s a safe bet the Reserve has stuck with 2.75 per cent. But Davies says the Reserve’s own econometric model of the economy, MARTIN, finds that potential growth has declined from 3.1 per cent in 2000 to 2.7 per cent in 2010 and 2.4 per cent in 2019.

In other words, when your forecasting method relies so heavily on reversion to the mean, if your estimate of potential growth is too high, it’s hardly surprising you’ll forecast more growth than you ever get.

But what’s wrong with the econocrats’ estimate of the potential growth? It could be in one or more of their estimates of growth in its three P components, but Davies’ checking shows it’s not population or participation, but productivity.

Davies says the MARTIN model shows that trend growth in productivity has slowed from 2 per cent a year in 2000, to 1.3 per cent in 2010 and to 1.1 per cent in 2019. This slowdown is not peculiar to Australia, but has occurred across the advanced economies.

Taking the median rate for those other economies, he estimates that the annual improvement in their productivity of labour per hour worked has slowed from 1.9 per cent in the 10 years before the crisis, to 0.8 per cent in the years since the crisis.

Davies’ equivalent estimates for us are similar: from 2.1 per cent to 1.2 per cent.

Okay, so why has productivity improvement slowed? Labour productivity has two components: “capital deepening”, where investment in more capital equipment per worker makes workers more productive, and “multi-factor productivity”, which is the improvement that can’t be explained by anything but technological progress (not more equipment so much as better equipment, plus improvements in the way factories and offices are organised) and reforms to the structure of the economy (“micro-economic reform”).

Davies finds the overall decline is mainly explained by the weakest rate of improvement in multi-factor productivity in decades – that is, little technological progress, here or overseas – but also by investment in the stock of non-mining physical capital that’s only just keeping up with the growth in the supply of labour (which, I imagine, hasn’t been helped by our need for “capital widening” to provide equipment to all the extra migrant workers).

What Davies’ digging has really exposed, of course, is the econocrats’ refusal to accept that our economy’s caught in former Bank of England governor Mervyn King’s “low-growth trap”.
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Wednesday, December 11, 2019

How Morrison is putting politics ahead of policy

If you think Scott Morrison’s been busy doing not very much since the election in May, you are much mistaken. In truth he’s been very busy doing stuff of not much interest to you. But sometimes it pays to take an interest in things that don’t seem of interest.

For instance, I wouldn’t expect you to have taken much interest in the reshuffle of government departments he announced on Friday. But I’ve been reading up on it and been amazed – or appalled – by what I’ve learnt.

It’s said to be the most dramatic overhaul of the federal public service since 1987, cutting the number of departments from 18 to 14 while creating four new mega-departments and removing five department secretaries, three of them women.

Morrison said it was not a cost-saving measure, but had been done to “better align and bring together functions within the public service so they can all do their jobs more effectively and help more Australians”.

So be very clear on that: it’s been done to ensure you and I get better service from the public service. Specifically, the number of departments was shrunk so as to “ensure the services that Australians rely on are delivered more efficiently and effectively”.

I just have one problem: that’s what they all say. If Morrison had increased rather than decreased the number of departments, he would still have assured us it would make the public service more efficient and effective.

This is hardly the first time departmental arrangements have been changed. They’re changed after every election and often several times more. Changes are so common bureaucrats have a name for them: MoG – changes in the “machinery of government”.

According to calculations by Bob McMullan, former Labor minister turned academic, more than 200 changes have been made since 1993-94. “In 2015-16, machinery of government changes involved the movement of 8000 staff in 21 separate changes. Changes following the 2013 election, which involved the movement of 12,000 staff, cost an average of $14 million per agency.”

Governments everywhere do it, but research by academics at UNSW’s Canberra campus suggests Australian governments do it far more than others. “Even governments with an emphasis on ‘cutting red tape’ [such as this one] have undertaken extreme and costly MoG changes,” they say.

So why are the latest changes said to be the biggest since 1987? Because that’s when the Hawke government introduced the idea of merging departments into mega-departments. Paul Keating reversed some of those changes and John Howard undid much of the rest. Get it? It’s time to mega up again.

When the changes cause the name of some function to drop out of the ever-longer titles of departments, the interest group invariably sees red. A few years ago it was the scientists, this time it’s the arts. Actually, the arts have never had their own department, but have been shunted from one department to another.

Since Bob Hawke’s day they’ve gone from Environment to Communications, back to Environment, then Regional Development, Prime Minister and Cabinet, back to Regional Development, then Attorney-General’s, back to Communications and now to the new mega Department of Infrastructure, Transport, Regional Development and Communications.

So many MoG changes involve moving functions from one department to another that McMullan has christened them “merry-go-round decisions”. “Responsibility for childcare, aged care and Indigenous affairs (to name a few) have all been the subject of multiple shifts in the past decade. In some cases, the functions have moved out of one department only to return to their original home a few years later,” he says.

He adds that “disentangling financial structures, IT support structures, property responsibilities and HR systems from old organisations and reintegrating them into new ones takes considerable time and effort”.

Former boss of Prime Minister’s Terry Moran’s comment on the latest changes is blunter: “There’ll be turmoil in many departments for a significant period."

So why do the changes keep happening? Partly to create the appearance of progress – “reform”. Sometimes I think the pollies are trying to convince themselves as much as us. But mainly to indulge the preferences, prejudices and professed priorities of the prime minister and his or her ministers.

It’s notable that these extensive changes to the bureaucracy – including the sacking of five department heads – involve no changes to the ministry. The new mega Department of Agriculture, Water and the Environment will now contain three Cabinet ministers, co-equal in power and glory.

What particular preferences and prejudices of Morrison do the latest changes reveal? I think it reveals this government’s disdain for public servants. It’s the revenge of the ministerial staffers (which many ministers started their political careers as). Who needs public servants giving ministers advice when it’s the staffers who understand the politics of the matter?

This is Morrison surrounding himself with the top public servants he knows and likes, replacing the ones who want to keep talking about policy with can-do men and women who don’t argue.

Morrison has repeatedly expressed his belief that he doesn’t need policy advice from public servants. They should just be getting on with implementing the policies the government gives them.

I think this is Morrison perfecting the hermetic seal of his personal Canberra bubble. He already knows what’s on his to-do list and he doesn’t want news from the outside world delaying or deterring him from his purpose.
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Monday, December 9, 2019

Please, no more Pollyanna impressions in the budget update

The mid-year budget update we’ll see next Monday presents the government and its econocrats with a threshold question: can their battered credibility withstand one more set of economic forecasts based on little more than naive optimism?

Or won’t it matter if first the industry experts, and then the Quiet Australians in voterland, get the message that budgets are largely works of fiction - based on political spin, with forecasts crafted to fit - and so are not to be believed?

Last week’s national accounts confirmed five successive quarters of weak growth in the economy and left Reserve Bank governor Dr Philip Lowe’s lovely thought of the economy reaching a “gentle turning-point” looking pretty ragged.

Maybe if you squint you could see a pattern of improvement, with the economy’s weakness concentrated in the last two quarters of 2018 (growth in real GDP of 0.3 per cent and 0.2 per cent), and strength returning in the first three quarters of this year: 0.5 per cent, 0.6 per cent and now 0.4 per cent.

Trouble is, that ain’t economics, it’s numerology: looking at a pattern of numbers without troubling your head with the varying factors that are driving them. Look at what’s driving those numbers and the illusion is dispelled.

Every part of the private sector is weak: consumer spending, home building and business investment, so much so that, as a whole, it’s actually contracting. That consumer spending is weak and getting weaker – despite the tax cut and three cuts in interest rates – is hardly surprising when you remember how weak the growth in wages has been.

It’s a great thing that public sector spending is providing most of what little growth we’re getting while the private sector goes backwards, but it doesn’t count as a sign the economy’s getting back on its feet.

As for the contribution from net exports, it would be more encouraging if it weren’t for the knowledge that a fair bit of it comes from the fall in imports you’d expect to see when domestic demand is “flat to down”.

But for a disillusioning summary statistic, try this: real household disposable income per person – a good measure of average material living standards - has essentially been flat since the end of 2011. So the Quiet Australians have nothing to show for eight years of toil. The rest is a conjuring trick where high population growth is passed off as growing prosperity.

Three quarters into our run of five weak quarters, Scott Morrison fought the election on a claim to have delivered a Strong Economy. The two subsequent sets of national accounts have destroyed that masterpiece of the marketer’s art.

But Morrison’s misrepresentations came bolstered by Treasury forecasts and projections showing the economy would quickly recover from weakness to strength, whereupon it would enter a five-year period of above-trend (3 per cent) annual growth before reverting to trend for the rest of a decade.

This flight of back-of-an-envelope fancy not only appeared to be Treasury’s endorsement of Morrison’s unfounded claims about strong growth, they supported the government’s claim that the budget could easily afford to double the tax cuts announced in the previous year’s budget – taking the cumulative cost to revenue to $300 billion over a decade – and still achieve healthy annual surpluses, eliminating the government’s net public debt by June 2030.

Just eight months later, these fearless forecasts aren’t looking too flash. They had the economy returning to trend growth of 2.75 per cent this financial year and inflation returning to 2.5 per cent by June 2021.

Most wonderful of all, they had annual wage growth accelerating to 2.5 per cent by June (actual: 2.3 per cent, falling to 2.2 per cent following quarter), to 2.75 per cent by June next year, then to 3.25 per cent by June 2021 and 3.5 per cent by June 2022 and in all subsequent years.

Wages are such a central driver of the economy, this triumph of hope over experience was essential to any forecast recovery in consumer spending and economic growth, not to mention any return to (bracket-creep-fuelled) budget surpluses despite tax cuts.

See the problem Treasurer Josh Frydenberg and his troops face in preparing next Monday’s mid-year budget update? Do they keep playing the budgetary version of the with-one-bound-our-hero-broke-free game and leave themselves open to growing derision, or do they stop pretending, offer plausible forecasts and adopt a more defensible projection methodology, and start on the long road back to being respected and authoritative?

But if the days of Treasury being game to give the boss (Morrison) forecasts he won’t like are long gone, that raises a courage question for the Reserve heavies: when will they stop ensuring their forecasts tick-tack with Treasury’s and start telling us what they really think?
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Saturday, December 7, 2019

Sorry, the economy can't grow much without higher wages

I usually pooh-pooh all alleged recessions that have to be qualified with an adjective. With recessions, it’s the whole economy or nothing. But I’ll make an exception for the "household recession" – which tells you why this week’s news of continuing weakness in the economy provides no support for Scott Morrison’s refusal to stimulate it.

Households are only part of the economy, of course, but they’re the part that matters above all others. Why? Because they contain all the people. And because all the other parts – the corporate sector, the public sector and the "external" sector of exports and imports – exist solely to serve we the people.

The economy’s "national accounts", issued this week by the Australian Bureau of Statistics, showed weak growth for the fifth quarter in a row, with real gross domestic product growing by just 0.3 per cent in the September quarter of last year, 0.2 per cent in the December quarter, 0.5 per in March quarter this year, 0.6 per cent in the June quarter and now a disappointing 0.4 per cent for this September quarter.

That took the annual growth in real GDP up from a (revised) 1.6 per cent over the year to June, to 1.7 per cent over the year to September. Morrison needed a lot better than that to convince anyone bar his my-party-right-or-wrong supporters that a response to the Reserve Bank’s repeated pleas for budgetary stimulus could be delayed until the budget in May.

To see how weak that is, remember our economy’s estimated "trend" or average rate of growth over the medium term is 2.75 per cent a year – about 0.7 per cent a quarter.

But let’s get back to households and their finances. Their spending on consumption grew by an almost infinitesimal 0.1 per cent in real terms during the latest quarter, or by 0.5 per cent before taking account of inflation.

Sticking to before-inflation figures (even though all the other national-account figures I quote are always inflation-adjusted), the quarter saw households’ main source of income – wages – grow by 1.1 per cent, which other, lesser income sources shaved to growth of 0.8 per cent in total household income.

However, the amount households had to pay in income tax fell by 6.8 per cent, thanks mainly to the arrival of the government’s new middle-income tax offset. This meant that households’ disposable income grew by a much healthier 2.5 per cent.

But something led most households to save rather than spend the tax break, causing their total saving during the quarter to jump by 80 per cent and their ratio of saving to household disposable income to leap from 2.5 per cent to 4.8 per cent. That’s why their consumer spending grew by only 0.5 per cent, as we’ve seen.

It’s possible people will get around to spending more of their tax cut but, with household debt at record levels after years of rising house prices, and continuing weak wage growth, it’s not hard to believe they’re too worried to spend up at a time when the economy's hardly onward-and-upward.

They may be intending to pay down some debt, just as it’s likely many people with mortgages have allowed the fall in the interest rates they’re being charged just to speed up their repayment of the loan.

Whatever, the faster consumer spending Morrison and his loyal lieutenant assured us their tax cut would bring about hasn’t materialised. And it’s noteworthy that what little consumer spending we’ve seen has been on essentials rather than discretionary items.

One discretionary spending decision is whether to buy a new car. Separate figures show new car sales in November were down 9.8 per cent on November last year.

So if the biggest part of the economy has done next to nothing to generate what little growth we’ve seen, where’s it coming from?

Well, not from the business end of the private sector. Spending on the building of new homes was down 1.7 per cent in the September quarter and by 9.6 per cent over the year to September. Business investment spending was down 2 per cent during the quarter and by 1.7 per cent over the year.

All told, the private sector – consumer spending, home building plus business investment – fell for the second quarter in a row and is 0.3 per cent lower than a year ago.

By contrast, public sector spending – the thing Morrison & Co profess to disapprove of – is going strong, with government consumption spending up by 0.9 per cent in the quarter, and 6 per cent over the year, mainly because of the continuing rollout of the National Disability Insurance Scheme.

Public investment in infrastructure – mainly by the state governments – grew 5.4 per cent in the quarter, to be 2.1 per cent up on a year earlier. All told, growth in the public sector accounted for most of the growth in the economy overall in the September quarter.

That leaves the external sector – aka "net exports" – making a positive contribution to overall growth during the quarter, with the volume of exports up 0.7 per cent while the volume of imports was down 0.2 per cent. (Falling imports, however, are a sign of a weak domestic economy.)

Another seeming bad sign – worsening productivity, with GDP per hour worked down 0.2 per cent in the quarter and 0.2 per cent over the year – wasn’t as bad as it seems, however.

When you’ve had the good news that employment has grown faster than you’d expect given the weak growth in output of goods and services, productivity – output per unit of input – falls as a matter of arithmetic. Does that make the employment growth a bad thing?

I’ll leave the last word to Callam Pickering, of the Indeed job site: "As long as wage growth remains so low, it will be difficult for the economy to return to annual growth of 3 per cent or higher. Quite simply, it is almost impossible to have a strong economy without a healthy household sector."
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Wednesday, December 4, 2019

Women are making themselves at home in the workforce

In the world of paid work, women still have a lot to complain about: unequal pay and promotion, still-inadequate childcare, and a tax and benefit system that discourages “secondary earners” from working more.

All true. But don’t let this conceal from your notice the success women are having at flooding into the long male-dominated workforce and slowly reshaping it to their needs.

In my never-humble opinion, for as long as girls continue making themselves better educated than boys, it’s only a matter of time before women are calling the shots.

Reserve Bank deputy governor Dr Guy Debelle highlighted women’s growing role in the labour market in a speech he gave last week.

You’ve no doubt heard the government boasting about how strongly the number of jobs has grown on its watch. It’s true. The rest of the economy hasn’t been doing well – wages, the standard of living, for instance – but employment has been growing at the disproportionately strong annual rate of about 2.5 per cent over much of the past three years. As a consequence, a near-record 62.6 per cent of all Australians aged 15 and over have a paid job.

But here’s what the pollies never mention, but Debelle noted: women accounted for two-thirds of the additional jobs in the past year.

This means the rate at which working-age females are participating in the labour force is now at its highest. So with female participation continuing to grow strongly over the decades, while male participation has fallen back, the gap between male and female participation is the narrowest it’s been.

Similarly, if you look just at the gender of those with jobs, women’s share is now above 47 per cent. Similar trends are occurring in all the advanced economies, of course.

Debelle says “changing societal norms and rising educational attainment have contributed to more women moving into ... employment outside the home. Female participation has also been influenced by the increasing flexibility of working-time arrangements, the availability and cost of childcare and policies such as parental leave.”

True. There was a time when most employers thought in terms of full-time workers and not much else – an attitude reinforced by the male-dominated unions. The increasing use of part-time employment has greatly added to the “flexibility” with which employers can deploy labour within their businesses, and no doubt helped to make them more profitable.

But the fact remains that the advent of part-time employment has been a boon, first, to women seeking a career as well as motherhood, then to full-time university students seeking income while they study, and now to many older workers seeking a mid-point between the extremes of full-time work and retirement. So the dread “flexibility” can benefit workers as well as bosses.

Debelle says that the participation rate of mothers with dependent children has kept increasing, rising by 10 percentage points since the early 2000s to 73 per cent. Over the past decade, the rise has been most pronounced for mothers with children aged up to 4.

Of those returning to work within two years after the birth of a child, an increasing majority are citing “financial reasons” as their main reason for doing so. Others returning to work cite “social interaction” or to “maintain career and skills” as their main reason.

Financial reasons could be capturing a number of considerations, according to Debelle, including low growth in wages, the rise in household debt or childcare costs.

Research suggests the cost and quality of childcare does have a significant effect on the willingness of women to do paid work, he says. According to the HILDA survey – of household income and labour dynamics in Australia – the share of households using (more expensive) formal childcare for young children has increased notably over the past decade.

Even so, access to childcare places and financial assistance with childcare costs remain “very important” issues for mothers not back at work.

Debelle says the rise in the level of mortgage debt owed by households in recent decades has “broadly coincided” with the increase in women’s rate of participation in the labour force. But which one’s causing what?

Are debt levels higher because more households have two incomes and so can afford to borrow more? (If so, that would suggest the increase in second incomes is helping to push up house prices.)

Or does the need to borrow more to afford the higher prices drive women’s decisions to go back to work? Maybe the low growth in wages in recent years has caused couples to have more debt than they anticipated and thus needing to work more to pay it down.

What little research evidence there is has usually found it’s the higher debt levels that lead to more women going back to work, but the evidence isn’t strong.

Looking beyond the continuing increase in participation by the mothers of young children and the ever-growing workplace role of prime-aged women – 25 to 54 years – of which it is part, women also account for a big part of the swing from early to later retirement.

Do you realise that 60 per cent of women aged 55 to 64 are taking part in the labour force? That compares with 20 per cent or so before the turn of the century. And the rising participation by women 65 and over isn’t all that much less than for men. Times change.
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