Water reform report’s big smile hides its big teeth: much more to do

A quick look at the Productivity Commission’s draft report on national water reform reminds me of the repeated judgment from old Mr Grace, the doddering owner of the department store in Are You Being Served? as he headed for the door: “You’ve all done very well!”

Its review of the progress of the National Water Initiative signed by the federal and state governments in 2004 – encompassing agreements on the Murray-Darling Basin – is terribly polite, understated and relentlessly upbeat.

Apparently, governments have made “good progress” in having “largely achieved” their reform commitments. All that remains is just the need for a teensy-weensy bit of “policy renewal”.

This mild-mannered stuff and congratulatory tone bear no resemblance to my memories of meetings of angry farmers railing against stupid greenies and other city slickers; of their insistence that the immediate needs of irrigators and irrigation towns along the river take priority over the river system’s ultimate survival; of each state government’s insistence on favouring their own irrigators over those in states further down the river; of federal and state National Party ministers happy to slip farmers a quiet favour, avoid enforcing the rules and turn a blind eye to blatant infringements; of federal Labor ministers who, even with no seats to lose in the region, were unwilling to make themselves unpopular by standing up for the rivers’ future.

I remember that the Howard government spent billions of city slickers’ money helping individual farmers make their irrigation systems more resistant to evaporation and seepage when all the benefits went to the farmer and none to the river system.

I remember all the infighting between government water agencies, and the mass fish kills during the recent drought in NSW and Queensland, for which the managers of the system accepted no responsibility.

Fortunately, reporters are adept at ignoring all the happy flannel up the front of government reports and finding the carefully hidden bad bits. And fortunately, we have the assistance of long-standing water experts, including the economist Professor Quentin Grafton, of the Australian National University, whose summary of the report on The Conversation website is headed: “Our national water policy is outdated, unfair and not fit for climate challenges.”

“The report’s findings matter to all Australians, whether you live in a city or a drought-ravaged town. If governments don’t manage water better, on our behalf, then entire communities may disappear. Agriculture will suffer and nature will continue to degrade,” he says.

The report’s proposal to make “water infrastructure developments” a much larger part of the National Water Initiative is a critical way to keep governments honest. For years, state and federal governments have used taxpayers’ dollars to pay for farming water infrastructure that largely benefits big corporate irrigators, Grafton says.

Last year the Morrison government announced a further $2 billion for its Building 21st Century Water Infrastructure project. Such megaprojects, he says, perpetuate the simplistic myths of the early 20th century that Australia – the driest inhabited continent on Earth – can be “drought-proofed”.

When governments signed the original initiative in 2004, they agreed to ensure investments in infrastructure would be both economically viable and ecologically sustainable. But many projects appear to be neither.

The report notes, for example, that the construction of Dungowan Dam in NSW means “any infrastructure that improves reliability for one user will affect water availability for others”. The “prospect of ‘new’ water is illusory”.

The report warns that projects that aren’t economically viable or ecologically sustainable can “burden taxpayers with ongoing costs, discourage efficient water use and result in long-lived impacts on communities and the environment”.

Equally disturbing is that billions of dollars for water infrastructure are presently targeted primarily at the agriculture and mining industries, while communities in desperate need of drinking water that meets water quality guidelines miss out, Grafton says.

Fortunately, the report isn’t so house trained as to avoid mentioning the gorilla the Morrison government prefers not to notice. There’s a lot about the consequences of climate change. It says droughts will likely become more intense and frequent and, in many places, water will become scarce.

In Grafton’s summary, the report says planning provisions were inadequate to deal with both the millennium drought and the recent drought in Eastern Australia. The 2012 Murray-Darling Basin Plan, for instance, took no account of climate change when determining how much water to take from rivers and streams.

The present federal government actually dismantled the National Water Commission in 2015, meaning we no longer have a resourced, well-informed agency to “mark the homework” and make sure the reforms were being implemented as agreed, Grafton says.

In 2007, the worst year of the millennium drought – and the year John Howard feared he’d lose the election if he didn’t match Labor’s promise to introduce an emissions trading scheme – Howard remarked that “in a protracted drought, and with the prospect of long-term climate change, we need radical and permanent change”.

Grafton says we’re still waiting for that change. “If Australia is to be prosperous and liveable into the future, governments must urgently implement water reform.”

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Flogging the monetary-policy horse harder won't help

It didn’t quite hit the headlines, but when Reserve Bank governor Dr Philip Lowe appeared before the House of Reps economics committee a week or so ago, he came under intense questioning from the Parliament’s most highly qualified economist, Labor’s Dr Andrew Leigh.

In my never-humble opinion, Leigh had the wrong end of the stick.

One criticism was that the board of the Reserve Bank is dominated by “amateurs” – business men and women appointed by successive federal governments. According to Leigh, pretty much every other central bank has its decisions on monetary policy (whether to raise or lower interest rates) made by committees of outside monetary experts, who are well equipped to challenge the bank’s own technical analysis.

This is a chestnut I’ve been hearing for decades. It smacks of the old cultural cringe: Australia is out of line with the big boys in America and Europe, therefore we’re doing it wrong. The people in our financial markets spend so much time studying the mighty US economy that their line’s always the same: whatever the Yanks are doing we should be doing.

Sorry, not convinced. It sounds to me like a commercial message from the economists’ union. Why give those plum appointments to businesspeople when you could be giving them to us? When you leave the “technical analysis” just to the hundreds of economists working in the Reserve, you risk them suffering from “group think”, we’re told.

And you’d escape group think by having a committee dominated by professional economists? Economics is the only profession that doesn’t suffer from “model blindness” – the inability to see factors that have been assumed away in the way of thinking about issues that’s been drummed into them since first year uni?

I don’t think so. It’s inter-disciplinary analysis that might improve the decisions, but that’s something most economists hate. After reading Kay and King’s Radical Uncertainty, I’m happier than ever with the idea that the governor and his minions should be put through their paces by people chosen for their real-world experience, not their membership of the economists’ club.

Leigh was on stronger ground when he asked why governments had stopped including a union boss along with all the businesspeople.

But Leigh’s main criticism was that the Reserve had been “too timid in focusing on getting inflation up into the target band”. For the “amateurs” reading this, he meant why hadn’t the Reserve cut the official interest rate earlier and harder since the global financial crisis, so as to get demand growing faster, creating more employment, lifting real wages and the inflation rate in the process.

After his board’s February meeting, Lowe announced that it would be doing $100 billion more “quantitative easing” (buying second-hand government bonds with created money, so as to lower longer-term public and private interest rates). Leigh asked why he hadn’t been more purposeful and announced $200 billion in purchases.

When you’re looking for things to criticise, saying that whatever’s just been done should have been done earlier or bigger is the easiest one in the book. Various other dissident economists are saying what Leigh’s saying.

But, as so often with economists, they’re not drawing attention to the assumptions – explicit and implicit – that lie behind their policy recommendations. Their key assumption here is that cutting interest rates is still as effective in encouraging borrowing and spending as the textbooks say it is.

If households are saving more than we’d like, the reason is that interest rates are too high; if businesses aren’t investing enough, the reason is that rates are too high. So, although interest rates have been at record lows for years, just a couple more cuts (achieved by conventional or unconventional means) would do the trick and get the economy growing strongly.

And although household debt is at record highs, this wouldn’t inhibit people’s willingness to load themselves up with more. Leigh and his mates seem to be having trouble with the concept of “diminishing returns” – that the third ice cream you eat never tastes as good as the first.

Though Lowe can’t or won’t admit it, the obvious truth is that, in the world economy’s present circumstances – “secular stagnation” and all that - monetary policy has pretty much run out of puff. Which explains why he’s been moving into unconventional monetary policy so reluctantly and why, for the whole of his term, he’s been pressing the government to make more use of its budget (fiscal policy) to get the economy moving.

Some of Lowe’s critics, being monetary specialists, have (like the Reserve itself) a vested interest in continuing to flog the monetary policy horse. Other’s deny the effectiveness and legitimacy of using fiscal policy to manage demand, as part of their commitment to Smaller Government.

But perhaps the most revealing exchange came when Leigh accused the Reserve of failing to act on what its own econometric model of the Australian economy, MARTIN, (as in Martin Place) would be telling it. The reply from Lowe’s deputy, Dr Guy Debelle (whose PhD from the Massachusetts Institute of Technology is a match for Leigh’s from Harvard) was dismissive.

“I would just note that macro models don’t do a very good job of modelling the financial sector [of the economy]. They failed pretty poorly in 2007 [the global financial crisis] when macro discovered finance. I think there’s an issue around transmission [the paths through which a change in interest rates leads to changes in other economic variables] which these models don’t take into account,” Debelle said.

“They’re linear. Actually, they assume that financial markets don’t exist, broadly speaking.”

I find it reassuring that our econocrats understand how primitive econometric models of the economy are, and don’t take their results too seriously.

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Why we're stuck with low interest rates for a long time

When it comes to interest rates, we’re living in the strangest of times, with rates lower than ever.

Savers are getting next to no reward for lending their money. Does this make sense? Not really. But we’re moving through uncharted waters and aren’t sure how we’ll get out of them, nor what happens next.

When Reserve Bank governor Dr Philip Lowe appeared before Parliament’s economics committee last Friday, he was asked whether we get the interest rates the world forces on us, or whether our authorities are free to set the rates they want.

Lowe’s answer was “we have the freedom, but we don’t”. Huh? “It’s complicated,” he explained.

Sure is. What he could have said is that we have some freedom, but not much. Were we to set our interest rates at a very different level to those in the rest of the world, there’d be a price for us to pay.

His own explanation was as clear as mud: we don’t have freedom in a structural sense, but we still have freedom in a cyclical sense.

Let me have a go. Remember that, as part of the process of globalisation over the past 40 years, the rich countries’ national financial markets are now so closely integrated with each other that each country exists in what’s pretty much a single global market, producing a single long-term real interest rate.

Purely by virtue of its big share of the global market, the things an economy as big as the US does can influence the level of the global interest rate. But nothing a middle-size economy like ours does is big enough to move the world rate. We are, as economists say, a “price taker”. We’re free only to take it or leave it.

The market price of something (including the price of borrowing money – the rate of interest) is set by the interaction of demand and supply: how much of it the buyers want to buy, relative to how much the sellers want to sell.

Lowe explained that the reason the “world equilibrium interest rate” has fallen so close to zero since the global financial crisis of 2008 is that, around the world, there’s been an increased desire by people to save, but a reduced desire to invest. That is, savers want to lend a lot more money than investors want to borrow, so interest rates have fallen sharply.

I think by now most economists accept this as the best explanation for the amazing low to which interest rates have fallen. It’s what Lowe means by “structural”. Just why saving is so much greater and investment so much smaller are questions economists are still debating.

Note that this explanation laughs at the standard view in neo-classical economics that saving increases when interest rates are higher, while investment increases when interest rates are lower.

Nor does it fit with the view that the “natural” rate of interest should reflect the rate of business profitability. Although the profits of some businesses have been hard hit by the pandemic, before it arrived – and even since, for most businesses – profitability has been high.

An alternative, minority view – pushed by economists at the Bank for International Settlements in Basel, the central bankers’ central bank – is that world interest rates have fallen so low because of the Americans’ excessive use of “quantitative easing” (central banks buying second-hand bonds and paying for them with money they’ve just created) after the global financial crisis and then, once the US economy had recovered, their failure to sell those bonds back to the market and so push interest rates back up.

An economy where households are saving too much of their incomes, and businesses don’t want to invest in expansion, is an economy that’s growing too slowly and not creating many new jobs. The solution, Lowe said, was to give people confidence to spend (and so get their rate of saving down) and give firms the confidence to invest.

How is he doing this? By cutting the official interest rate as close to zero as possible, and using quantitative easing to lower longer-term government and private sector interest rates. Really? Sounds to me like hoping to recover from a hangover by having another drink.

But back to the point. If interest rates ought to be higher to give savers a decent reward on the money they lend, why can’t our central bank set our interest rates higher than those being paid in other parts of the world?

Well, it can. We do retain that freedom. But because our financial markets are just part of the global market, what that would do is push up our exchange rate.

Why? Because financial institutions around the world would shift money into Australian dollars so as to get into our market and take advantage of our higher interest rates. When the demand for “the Aussie” exceeds the supply, the price goes up.

Such a rise in our currency’s rate of exchange against other currencies would reduce the international price competitiveness of our export and import-competing industries, thus reducing our economy’s growth and job opportunities.

That’s the price we’d pay for stepping out of line.

Lowe told the committee that the two main factors that drive the value of our dollar are world commodity prices and relative interest rates – that is, the level of our interest rates relative to other countries’ rates.

The prices we receive for the commodities we export (particularly iron ore) are up but, he said, the Aussie hadn’t appreciated (risen) by as much as you’d expect from past relationships. Why not? Because our lower official interest rates and quantitative easing have narrowed the interest rate “differential” between our rates and the rest of the world.

So, although rising commodity prices have caused our exchange rate to go higher, our quantitative easing has nevertheless caused the dollar to be “lower than it otherwise would be”. Ah. That’s the game he’s playing.

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Canberra's latest innovation: politics without policy

The most remarkable development since we returned to work this month is Scott Morrison’s barefaced announcement that the government has enough on its plate rolling out the virus vaccine and getting unemployment down, and so there’ll be no attempt to deal with any of our many other problems before the election late this year or early next.

There could be no franker admission that we live in an era of leaders who lack the ambition and courage to lead. Only on those problems so acute the mob is baying for the government to “Do Something!” will something be done – or grand announcements made that give the appearance it’s being done.

It’s Prime Minister as odd-job person. You don’t look for ways to secure our future, you sit there waiting for pressing matters to turn up: a light bulb that must be changed, a dripping tap that needs a new washer. Acute problems, yes; chronic problems, through to the keeper.

It’s the confirmation of what all but the rusted-on voters have long suspected: that our politicians are motivated far more by the desire to attain and retain office than by any great desire to make the world a better place for us to live and bring up our kids.

The opposing political parties continuously accuse each other of being “ideological” – of being mad free-marketeers or tax-and-spend socialists – but this serves mainly to con along their side’s true believers and conceal from the rest of us the political class’s overriding objective: to win the next election by fair means or foul.

It’s not hard to decipher Morrison’s thinking. Like the premiers, his popularity has soared following our successful containment of the pandemic, so his prospects of re-election are high – provided nothing goes wrong between now and then.

That does mean he must ensure there are no major glitches in the rollout of the vaccine – to which he will have to pay much attention – but he needs no further achievements to improve his chances of winning.

Indeed, anything else he attempts to fix offers more chance of losing the votes of the disaffected than of adding votes to his existing pile. According to informed sources (aka well-briefed gallery journalists), there’s little enthusiasm for “reform” of taxation, religious freedom, industrial relations or superannuation.

The government’s existing proposals for modest changes to industrial relations rules – about which the unions are making such fuss at present – will be put to the Senate next month but, should they fail to pass, will be dropped.

Some Liberal backbenchers’ urgings that the legislated phased increase in compulsory employer super contributions from 9.5 per cent of wages to 12 per cent be reversed (which I support) and the success of the non-profit industry super funds be sabotaged in other ways (which I don’t), have yet to be decided on, but will probably be rejected.

We’re told that Morrison’s thinking in turning away from any further policy improvement is that, after all the upheavals of 2020, the voters just want everything to calm down for a while. But that’s probably always true of many politician-weary voters. Sounds to me like a convenient rationalisation for a deeply cynical and self-serving political calculation.

You might expect this to hugely disappoint a policy wonk like me, but I confess my feelings are divided.

Morrison’s decision strike cuts both ways. He won’t be doing many things he should, but he won’t be doing many things he shouldn’t. The need for tax reform, for instance, is always with us – and urgent only in the minds of tax economists, who think of little else, and those well-to-do urgers hoping it will involve them paying less while others pay more.

There are, of course, many big problems he’ll be doing nothing to improve: the misregulation of aged care, the need for better-considered mental healthcare, the way the universities have been hung out to dry during the pandemic, the neglect and destruction of technical and further education, the many respects in which governments help oldies (including their parents) screw the younger generation.

The most urgent and important area of neglect is, of course, our response to climate change. But the federal Coalition is so deeply divided on the issue – and Morrison so hog-tied by loudmouth Liberal backbenchers and the Neanderthal Nationals – that it’s a delusion to expect genuine progress without a change of government.

And maybe not much then. As we speak, Labor is working on how many of its own policies to throw overboard. As Labor was reminded by its shock defeat in 2019, the trouble with policies is that they’re much harder for you to sell than for your opponents to misrepresent.

A big part of the reason politicians have become so lacking in policy courage is the way election campaigning has become so negative. After last time, the coming election is shaping as the battle of the scare campaigns.

Bulldust will fly on both sides. Both sides are readying themselves by having as few policies as possible. An unthinking electorate is being rewarded with policy-free elections. How edifying.

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The official forecasters’ latest guess is whistling in the dark

Although everyone knows it’s impossible to know what the future holds, everyone – from prime ministers to punters – asks economists to forecast what will happen to the economy. The economists always oblige. The latest set of official forecasts for our economy were laid before us by the Reserve Bank on Friday. You beaut. Now all is known.

Though economists have an appalling forecasting record, we are undeterred in asking for more, and the economists are undeterred in providing them.

Psychologists tell us people suffer from “the illusion of control” – the tendency to overestimate their ability to control events. Once we know what’s going to happen, we can duck and weave accordingly.

Maybe economists keep producing their forecasts merely to be obliging, but I suspect they suffer their own illusion: that having a dodgy forecast is better than not having any.

Particularly at times when we’re trying to recover from a recession – recessions the economists rarely if ever saw coming – Reserve Bank governors produce optimistic forecasts, or try to sound upbeat about a not-so-wonderful forecast, for the justifiable reason that what actually happens can, to some extent, be influenced by what enough people expect to happen. People tend to act on their expectations, as part of their illusion of control.

Reserve governor Dr Philip Lowe sounded very upbeat about his latest forecasts but, when you examine them closely, they’re not all that wonderful. Funny thing is, most of his optimism was based on the recession being not nearly as bad as he was forecasting throughout most of last year.

If he was conscious of the irony of sounding confident about this year’s forecast because last year’s had been so wrong, he did a good job of concealing it.

He’s certainly right in saying the economy bounced back after the easing of the initial lockdown far earlier and more strongly than anyone expected – with the possible exception of Scott Morrison, who was no doubt praying for another miracle.

If ever there was proof that we live in an age of “radical uncertainty” – where we must make decisions (or forecasts) on utterly insufficient information – the past year must surely be it.

The three after-the-fact reasons Lowe gave for being so wrong – we did a better job of suppressing the virus than expected; the government applied a lot more budgetary stimulus than expected; and businesses and households adapted their behaviour in unexpected ways to minimise the economic cost of the lockdown – are a useful checklist of what could go wrong with this year’s forecast of above-trend growth in real gross domestic product of 3.5 per cent in calendar 2021 and a further 3.5 per cent in 2022.

Such a seemingly optimistic prediction could prove just as wrong as last year’s – though in the opposite direction – if something goes wrong with the rollout of the vaccines or our containment of the virus, if the government’s imminent termination of its main stimulus measures proves premature, or if the behaviour of businesses and households is less helpful than the forecasters have assumed.

I suspect that most of the improvement in the economy’s rate of growth is improvement that’s already happened. It’s the bounce-back from the lifting of the lockdown, not the start of a sustainably strong recovery.

By about the middle of this year, the rapid bounce-back will have run its course, and the recovery proper will begin at a much weaker rate. If so, those two years of seemingly way-above-trend annual growth will look better than they really are, being partly an arithmetic illusion caused by our obsession with rates of change rather than the levels of GDP. The arithmetic catching up with the reality.

What forces will be driving the economy onward and upward? Not population growth, not a lower dollar, not a roaring world economy, not healthy business investment. Consumer spending is forecast to be strong, but it won’t get that strength from the forecast growth in real wages of a mere 0.25 per cent a year for the next two and a half years.

Nor will spending be powered by further budgetary stimulus. With the end of the JobKeeper wage subsidy and maybe the JobSeeker supplement in March, stimulus is being cut. No, if consumer spending stays strong it will be because stimulus payments made but not spent last year will be spent this year. Maybe. Maybe not.

But the ultimate proof that Lowe is not as optimistic as he appears is in his confident prediction that the Reserve won’t need to consider raising interest rates until 2024 at the earliest. Why? Because “wages growth and inflation are both forecast to remain subdued”. If so, the future won’t be all that wonderful.

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RBA governor abounds in optimism about the economy’s prospects

If you think the coronacession made last year a stinker for the economy, Reserve Bank governor Dr Philip Lowe has good news: this year pretty much everything will be on the up except unemployment.

All Reserve governors see it as their duty to err on the optimistic side, and Lowe is no slouch in that department. In his speech this week foreshadowing Friday’s release of the Reserve’s revised economic forecasts for the next two years, Lowe was surprisingly upbeat on what we can expect in “the year ahead”.

His first reason for optimism is that, though last year saw the economy plunge into severe recession for the first time in almost 30 years, it didn’t go as badly as initially feared.

For one thing, he says, Australians did what they usually do: respond well in a crisis. As a community, we have pulled together in the common good and been prepared to do what’s been necessary to contain the virus.

“Because of these collective efforts, Australia is in a much better place than most other countries. This is true for both the economy and the health situation,” he says.

The downturn in the economy was not as deep as the authorities had feared and the recovery has started earlier and has been stronger than expected. “Employment growth has been strong, as have retail sales and new house building. Across many indicators, including gross domestic product, the outcomes have been better than our central forecasts and often better than our upside scenarios as well,” he says.

As recently as August, the Reserve forecast that the rate of unemployment would be close to 10 per cent by the end of last year, and still be above 7 per cent by the end of next year. Its latest forecast is that unemployment peaked at 7.5 per cent in July and – having fallen to 6.6 per cent in December - will be down to 6 per cent by the end of this year.

Why hasn’t the recession been as bad as expected? Lowe offers three reasons. First, our greater success in containing the virus.

“That success has meant that the restrictions on activity have been less disruptive than we feared. It has allowed more of us to get back to work sooner and it has reduced some [note that word] of the economic scarring from the pandemic.”

The second reason the recession hasn’t been as bad as expected is that governments’ fiscal policy (budgetary) “support” has been bigger than expected, even in August. Most of this support has come from the federal government, but the states have also played a role.

Measuring this “support” the simple way the Reserve always does, by the size of the change in the overall budget balance (this time combining federal and state budgets), he puts it at almost 15 per cent of GDP.

Note that this way of doing it adds together two elements economists often separate: the deterioration in budget balances caused by budgets’ “automatic stabilisers” – that is, the move into deficit that would have happened even had governments not lifted a finger, coming from the fall in tax collections and the rise in dole payments – and, on the other hand, the cost of governments’ explicit decisions to stimulate the economy with extra government spending (the JobKeeper wage subsidy and the temporary supplement to JobSeeker dole payments, for instance) or tax cuts.

This greater-than-expected support has made a real difference, Lowe says. “It has provided a welcome boost to incomes and jobs and helped front-load the recovery by creating incentives for people to bring forward spending.

“There has also been a positive interaction with the better health outcomes, which have allowed the policy support to gain more traction than would otherwise have been the case.”

The third reason the bounce-back has been stronger than expected is that Australians have adapted and innovated. “Many firms changed their business models, moved online, used new technologies and reconfigured their supply lines,” Lowe says.

“Households adjusted too, with spending patterns changing very significantly. Some of the spending that would normally have been done on travel and entertainment has been redirected to other areas, including electrical goods, homewares and home renovations. Online spending also surged, increasing by 70 per cent over the past year” to about 11 per cent of total retail sales.

All this suggests a stronger economy in the coming calendar year. With the key assumption that the rollout of the coronavirus vaccines in Australia goes according to Scott Morrison’s plan, but that international travel remains highly restricted for the rest of this year, real GDP is now forecast to grow at the above-trend rate of 3.5 per cent over this year, and at the same rate again over next year.

In consequence, the level of real GDP will be back to where it was at the end of 2019, before the Black Summer bushfires and the arrival of the virus. Over that 18 months we’ll have had net economic growth of zero.

As we’ve seen, the forecast rate of GDP growth is expected to get the rate of unemployment down to 6 per cent by the end of this year. But then it will take a further 18 months to fall to 5.25 per cent.

As measured by the wage price index, wages grew by just 1.4 per cent over the past year, their lowest in decades. The underlying rate of inflation also grew by 1.4 per cent over the year, way below the Reserve’s target rate of 2 to 3 per cent.

“Given the spare capacity that currently exists [seen in the high unemployment and underemployment of labour, and in unused production capacity in factories and offices], these low rates of inflation and wage increases are likely to be with us for some time,” Lowe concludes.

If so, I’m not sure I’m as upbeat about the future as the Reserve Bank governor is.

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Whatever our other problems, there’s much less crime to fear

When I went to Sunday school we used to sing “count your many blessings, name them one by one”. It’s good advice, enthusiastically endorsed in recent times by the practitioners of “positive psychology”. But it’s not something the media do much to help us with. So you may not have noticed that we see far fewer stories about the rising crime rate and shocking descriptions of particular crimes.

That’s because, after rising for about three decades, Australia’s crime rate has fallen sharply since 2001. When the dog doesn’t bark, the media rarely notice. But this is a blessing we should be more aware of. Not everything about the world is going to the dogs.

In a book published this week, The Vanishing Criminal, Dr Don Weatherburn and Sara Rahman seek to answer the obvious question: why something that just kept getting worse has now been getting better for a decade or two. Weatherburn, formerly director of the NSW Bureau of Crime Statistics and Research, is now an adjunct professor at the University of NSW. Rahman is a researcher working in the NSW government.

First, the back story. The figures show that during the 1970s, ’80s and ’90s, Australia faced rapidly rising rates of break-and-enter, motor vehicle theft, robbery, stealing, assault and fraud.

The international crime survey of 2000, covering 25 countries, showed us having the second-highest rate of car theft, the highest rate of burglary, the highest rate of contact crime – covering robbery, sexual assault and assault with force – and the highest overall level of crime victimisation, the authors say.

At that stage, one in 20 Australian households was falling victim to burglary every year, one in 60 was losing a car to theft, and one in 20 people over the age of 15 was being assaulted, according to the Australian Bureau of Statistics.

Although the rates of particular crimes varied widely between suburbs and towns, no state or territory escaped the rise. “The spread of lawbreaking into the suburbs led to rapidly rising public concern, fuelled by an insatiable media and political appetite for stories about rising crime,” the authors say.

At the time, the country was in the grip of a heroin epidemic, which many believed to be responsible for the rise in theft and robbery.

But then, for no obvious reason, crime rates turned from going up to going down. This, too, occurred across all states and territories.

The authors say national recorded rates of property crimes fell precipitously after 2001. By 2017, break-and-enter had fallen by 68 per cent, car theft by 70 per cent, robbery by 71 per cent and other theft by 43 per cent.

The rates for murder fell by 50 per cent, attempted murder by 70 per cent and the overall rate of homicide (including manslaughter) by 59 per cent.

Rates of assault and sexual assault continued to increase, but since 2008, the annual prevalence of actual assault fell by a third, and threatened assault by almost a quarter.

The big exception is recorded rates of (adult) sexual assault, which were higher in 2017 than in 2001, which were higher than in 1993. This is probably due to increased willingness to report offences to police.

Internet fraud has increased, of course. So has use of methamphetamine – “ice”. But unlike heroin, the authors say, ice has so far not made any measurable impression on rates of theft and robbery. It’s probably affecting violent behaviour, of course.

So why the marked decline in so many forms of crime?

The authors note that crime rates have fallen in the United States, Canada, Britain, New Zealand and many European countries. But the decline has differed in its timing and degree in those countries, suggesting there is no single cause.

Rather, in explaining Australia’s decline, they see a coincidence of various factors. With homicide, they find that all the decline has been in gun deaths, rather than the more common knife attacks. So John Howard’s gun buy-back scheme may get some credit, but they think the best explanation is the steady improvement in emergency medical treatment.

Their best explanation for the fall in assaults is the decline in alcohol abuse among young people, in response to rising alcohol prices. Changes in some factors – such as the fall in heroin dependence – have had knock-on effects.

A reduction in the number of offenders relative to the number of police, and a decline in the size of the market for stolen goods, have allowed other factors – such as the risk of getting caught – to exert a greater influence.

Fortuitously, public pressure for the police to get better results reached its peak just as knowledge about what works in policing began to affect police strategy and deployment.

And all this occurred against a backdrop of low inflation, rising real wages and falling unemployment. Crime rates and unemployment do tend to rise together – something for Scott Morrison to remember as he contemplates putting out his Mission Accomplished banner.

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How economics could get better at solving real world problems

The study of economics has lost its way because economists have laboured for decades to make their social science more mathematical and thus more like a physical science. They’ve failed to see that what they should have been doing is deepening their understanding of how the behaviour of “economic agents” (aka humans) is driven by them being social animals.

In short, to be of more use to humanity, economics should have become more of a social science, not less.

This is the conclusion I draw from the sweeping criticism of modern economics made by two leading British economics professors, John Kay and Mervyn King, in their book, Radical Uncertainty: Decision-making for an unknowable future.

But don’t hold your breath waiting for economists to see the error of their ways. There are two kinds of economist: academic economists and practising economists, who work for banks, businesses and particularly governments or, these days, are self-employed as “economic consultants”.

Whenever I criticise “economists” – which I see as part of the service I provide to readers – the academics always assume I’m talking about them. It rarely occurs to them that I’m usually talking about their former students, economic practitioners – the ones who matter more to readers because they have far more direct influence over the policies governments and businesses pursue.

You see from this just how inward-looking, self-referential and self-sustaining academic economics has become. The discipline’s almost impervious to criticism. Criticism from outside the profession (including “the popular press”) can usually be dismissed as coming from fools who know no economics. If you’re not an economist, how could anything you say have merit?

But Kay and King are insiders. As governor of the Bank of England, King was highly regarded internationally. Kay has had a long career as an academic, author, management consultant, Financial Times columnist and head of government inquiries.

So their criticism will just be ignored, as has been most of the informed criticism that came before them. Their arguments will be misrepresented – such as that they seem opposed to all use of maths and statistics in economics. They’re not. But there’ll be little face-to-face debate. Too discomforting.

Trouble is, the push to increase the “mathiness” of economics has gone for so long that all the people at the top of the world’s economics faculties got there by being better mathematicians than their rivals.

They don’t want to be told their greatest area of expertise was a wrong turn. Similarly, all the people at the bottom of the academic tree know promotion will come mainly by demonstrating how good they are at maths.

Kay and King complain that economics has become more about technique – how you do it – than about the importance of the problems it is (or isn’t) helping people grapple with in the real world. (This may help explain why, in many universities, economics is losing out to business faculties.)

In support of their case for economics needing to be more of a social science, Kay and King note there are three styles of reasoning: deductive, inductive and “abductive”. Deductive reasoning reaches logical conclusions from stated premises.

Inductive reasoning seeks to generalise from observations, and may be supported or refuted by later experience. Abductive reasoning seeks to provide the best explanation for a particular event. We do this all the time. When we say, for instance, “I think the bus is late because of congestion in Collins Street”.

Kay and King say all three forms of reasoning have a role to play in our efforts to understand the world. Physical scientists (and mathy economists) prefer to stick to deductive reasoning. But this is possible only when we study the “small world” where all the facts and probabilities are known – the world of the laws of physics and games of chance.

In the “large world”, where we must make decisions with far from complete knowledge, we have to rely more on inductive and abductive reasoning. “When events are essentially one-of-a-kind, which is often the case in the world of radical uncertainty, abductive reasoning is indispensable,” they say.

And, so far from thinking “as if” we were human calculating machines, “humans are social animals and communication plays an important role in decision-making. We frame our thinking in terms of narratives.”

Able leaders – whether in business, politics or everyday life – make decisions, both personal and collective, by talking with others and being open to challenge from them.

The Nobel prize-winning economist Professor Robert Schiller, of Yale, has cottoned on to the importance of narratives in explaining the behaviour of financial markets, but few others have seen it. Most academic economists just want to be left alone to play the mathematical games they find so fascinating.

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Humans beat computers at knowing when to leap into the unknown

Two leading British economists who’ve launched a scathing critique of the unrealistic assumptions their peers have added to conventional economics to make it more tractable mathematically have not spared one of my great favourites: “behavioural economics”. It has lost its way, too.

The economists are Professor John Kay of Oxford University and Professor Mervyn King, a former governor of Britain’s central bank, the Bank of England. Their criticism is in the book, Radical Uncertainty: Decision-making for an unknowable future.

As I wrote in this column last week, economists have been working for decades to make their discipline more academically “rigorous” by using mathematical techniques better suited to the “stationary” physical world – where everything that happens is governed by the unchanging laws of physics – or to games of chance, where the probability of something happening can be calculated easily and accurately.

Kay and King call this modelling “small worlds”, where the right and wrong answers are clearly identified, whereas the large worlds occupied by consumers, businesses and government policymakers are characterised by “radical uncertainty”. We must make decisions with so little of the information we need – about the present and the future – that we can never know whether we jumped the right way, even after the event.

Economists’ analysis and predictions are based on the assumption that everything individuals and businesses do is “rational” – a word to which they attach their own, highly technical meaning. They think it means the decision-maker was able to consider every possibility and think completely logically.

Behavioural economics – which has been a thing for at least 40 years – involves economists using the findings of psychology to help explain the way people actually behave when they make economic decisions. It takes the assumption that people always act “rationally” and subjects it to empirical testing. Where’s the hard evidence that people really behave that way?

It shouldn’t surprise you that behavioural economists have found much behaviour doesn’t fit the economists’ definition of rational. They’ve done many laboratory experiments asking people (usually their students) questions about whether they prefer A, B, C or D, and have put together a list of about 150 “biases” in the way people think.

These “biases” include that people suffer from optimism and overconfidence, overestimating the likelihood of favourable outcomes. We are guilty of “anchoring” – attaching too much weight to the limited information we hold when we start to think about a problem. We are victims of “loss aversion” – hating losses more that we love the equivalent gains. And much more.

But this is where Kay and King object. As has happened before in economics, some highly critical finding is taken by the profession and reinterpreted in a way that’s less threatening to the conventional wisdom.

Over the years, I’ve written about many of these findings, taking them to mean the economists’ theory is deficient and needs to be changed.

But Kay and King claim the profession has turned this on its head, seeing the findings as meaning that a lot of people behave irrationally and need to be shown how to be more sensible.

This is an old charge against conventional economists: they don’t want to change their model to fit the real world, they want to change the world so it fits their model.

Why? Because economists think they know what behaviour is right and what’s wrong. What’s rational and what’s irrational. There is, indeed, a popular book about behavioural economics called Predictably Irrational. (The economists love the “predictable” bit – it implies they can get their own predictions right with only minor modifications.)

Kay and King object that most (though not all) the listed “biases” are not the result of errors in beliefs or logic. Most are the product of a reality in which decisions must be made in the absence of a precise and complete description of the world in which people live.

“Real people do not optimise, calculate subjective probabilities and maximise expected utilities; not because they are lazy, or do not have the time, but because they know that they cannot conceivably have the information required to engage in such calculation,” they say.

They note that whereas the American behavioural economists led by the Nobel-prize-winning psychologist Daniel Kahneman have put a negative connotation on the “heuristics” – mental short-cuts – people take in making their decisions, a rival group led by the German psychologist Gerd Gigerenzer sees it as proof of how good humans are at coping with radical uncertainty. It’s amazing how often we get it right.

Kay and King agree, saying that if humans don’t make decisions in the computer-like way economists assume we do, “it is not because we are stupid but because we are smart. And it is because we are smart that humans have become the dominant species on Earth.

“Our intelligence is designed for large worlds, not small. Human intelligence is effective at understanding complex problems within an imperfectly defined context, and at finding courses of action which are good to get us through the remains of the day and the rest of our lives. [Which aren’t the best solutions, but are “good enough”.]

“The idea that our intelligence is defective because we are inferior to computers in solving certain kinds of routine mathematical puzzles fails to recognise that few real problems have the character of mathematical puzzles.

“The assertion that our cognition is defective by virtue of systematic ‘biases’ or ‘natural stupidity’ is implausible in the light of the evolutionary origins of that cognitive ability. If it were adaptive [in the survival-of-the-fittest sense] to be like computers we would have evolved to be more like computers than we are. . .

“Our knowledge of context and our ability to interpret it has been acquired over thousands of years. These capabilities are encoded in our genes, taught to us by our parents and teachers, enshrined in the social norms of our culture,” they conclude.

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Sorry, the economy's bum does look big. We've put on a lot of weight

If you’re like many readers, you think economists and business people are obsessed with gross domestic product and dollars, dollars, dollars. So, as a never-to-be-repeated offer, today I’m going to write not about what Australia’s production of goods and services is worth, but what it weighs.

Believe it or not, Dr Andrew Leigh, a federal Labor politician and former economics professor, is just publishing the paper Putting the Australian Economy on the Scales in the Australian Economic Review.

Using a lot of ancient statistics and making various assumptions – so that his figures are, on his own admission, “rough” but still indicative – Leigh estimates that the physical weight of the nation’s annual output of goods and services has gone from 55,000 tonnes in 1831, to 6 million tonnes in 1900, 62 million tonnes in 1960, 355 million tonnes in 2000, and 811 million tonnes in 2018.

Of course, our population has grown hugely in that time, but the weight of output per person is also way up. It was less than a tonne in 1831, six tonnes in 1960 and 32 tonnes per person in 2018. That’s a 47-fold increase.

Well, that’s nice to know. But who in their right mind would bother working out all that? What does it prove? More than you may think – especially if you worry about the impact all our economic activity is having on the natural environment.

You’ve heard, I’m sure, about our big and growing “material footprint” caused by our production and consumption of raw materials. It, too, is measured by weight. The United Nations Environment Program International Resource Panel publishes estimates of the footprints of 150 countries, with the Australian figures coming from the CSIRO and industrial ecologists at the universities of Sydney and NSW.

In measuring a country’s footprint, they take account of four kinds of raw materials: biomass (from grass to timber), metals, construction materials and fossil fuels. It turns out, for instance, that the footprint of a kilo of beef is 46 kilos.

The UN takes a great interest in countries’ material footprint because one of its sustainable development goals is to decouple economic growth from environmental degradation. Ecologists worry that, particularly as poor countries lift their living standards up towards those the rich countries have long enjoyed, the pressure on the globe's natural environment will be . . . well, unsustainable.

But whereas the ecologists’ figures show all countries’ material footprints getting bigger, a lot of economists argue that as economic growth and advances in technology continue, the economy is “dematerialising” – getting lighter.

This is because most of the growth in GDP has come from more provision of services rather than more production of goods through farming, mining and manufacturing. Human labour has no weight, even though it may involve more use of electricity and fuel.

But also because the physical weight of many goods is falling. Leigh reminds us that houses and vehicles are built from lighter materials. Domestic appliances are more compact. Transport networks are more energy-efficient. Software makes it possible to upgrade devices – from games to cars – that might previously have required new physical parts or total replacement.

These shifts led Alan Greenspan, former chairman of the US Federal Reserve, to claim in 2014 that “the considerable increase in the economic wellbeing of most advanced nations in recent decades has come about without much change in the bulk or weight of their gross domestic product”. Without question, he argued, the economy “has gotten lighter”.

So the point of Leigh’s calculations is to check who’s right: those economists claiming the economy is dematerialising, or the ecologists calculating that our material footprint is getting heavier.

Clearly, he comes down on the side of the ecologists. Although his method gives an estimate of the economy’s weight that’s about a fifth lower than the ecologists’, he confirms the general trajectory of their continuing increase. He estimates that a 10 per cent increase in real GDP is associated with a 12 per cent increase in its weight.

Now, you could argue that Australia’s huge “natural endowment” of minerals and energy makes us quite unrepresentative of the advanced economies. Our mining industry has been booming, on and off, since the late 1960s. All you need to know is that our production of (heavy) iron ore – most of it for export – has risen ninefold since 1990.

But Leigh believes all the rich economies have expanding material footprints. The goods they consume may have been getting lighter per piece, but they’ve gone on consuming a lot more of them. Planes may be more fuel-efficient, but far more people are flying far more often (when we’re allowed). Clothes may be lighter, but we buy more of them. Food packaging may be thinner – I can remember when fruit and veg arrived at the greengrocers in wooden boxes - but we’re eating more takeaway meals.

Leigh concludes that, like the paperless office, the weightless economy remains surprisingly elusive. Which doesn’t change the need for us to put the economy on an ecological diet.

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The economy doesn’t work well without good public servants

You’d hope that one of the big things Scott Morrison learnt in 2020 was to have more respect and trust in his public servants. After all, they must get much of the credit for helping him – and the premiers – respond to the pandemic far more successfully than most other rich countries. What Morrison did right was take their advice.

Morrison began his time as Prime Minister by making his disrespect and distrust of public servants crystal clear. He was blunt in telling them he didn’t need their advice on policy matters, just their full cooperation in faithfully implementing the decisions he and the Cabinet made.

The Coalition has continued its Labor predecessor’s practice of imposing annual “efficiency dividends” – fixed percentage cuts in the money allocated to pay public servants’ wages and admin costs – which by now amount to annual rounds of redundancies, with those more senior public servants with policy experience being the ones most likely to get the heave-ho.

This has robbed the public service – and its political masters – of much benefit from its institutional memory of what works and what doesn’t. The government prefers to get its advice from the young people with political ambitions employed to help in ministers’ offices.

These young punks act as intermediaries between the minister and his department. Their great attraction is their loyalty to the party. They tend to be a lot stronger on political tactics than policy detail.

In a quite wasteful way, when the government has felt the need for advice on tricky policy matters it now pays top dollar for a report from one of the big four accounting firms busy turning themselves into management consultants (which is more lucrative).

Where does a bunch of auditors and tax agents find the expertise to advise on quite specialised issues of public policy? They hire – at much higher salaries - some of the redundant public servants who know all there is to know on particular topics.

Despite the expense to taxpayers, one reason the government likes to pay outsiders for advice is that, like all profit-making businesses, the consultants make sure they tell their paying customers what they want to hear, not necessarily what they need to be told.

By now, most big businesses have learnt it’s smarter to keep their core functions and expertise in-house, but the Liberals prefer to pay outsiders because they neither trust public servants nor like them. They don’t like them because they see them as members of the Labor “public” tribe, not their own Liberal “private” tribe. Private good; public bad.

The Libs don’t trust public servants for same reason: how could supporters of their rival tribe give them honest, helpful advice? Plus a bit of paranoia. Whenever Labor’s in office, the Libs sit fuming in opposition, watching the public servants working hard to help the government pursue its policy preferences and keep it out of trouble, and conclude the shiny-bums are doing it because of their partisan sympathies.

The Libs’ paranoid tribalism blinds them to the plain truth that the public service takes professional pride in wholeheartedly supporting the government of the day, while suppressing their personal political preferences.

In recent times, much of the Libs’ hostility towards public servants stems from John Howard. It was Howard – aped by Tony Abbott – who instituted the practice of beginning their term in office by sacking a bunch of department heads considered to be Labor-sympathisers (or in Abbott’s case, to be so hopeless they actually believed all that Labor bulldust about climate change).

This was retaliation, but also a knowing attempt to “encourage the others”. And it’s worked well in discouraging senior bureaucrats from giving ministers advice they don’t want to hear. But in a leader, surrounding yourself with yes-persons is a sign of weakness. If such a minister stuffs up, don’t be surprised.

You couldn’t have picked a crisis more likely to bust the Libs out of their I-don’t-need-any-advice hang-up than the pandemic. There’s no recent precedent and it’s full of technicalities. Anyway, who thinks they’re smart enough to tell a doctor they’re wrong?

By contrast, every Liberal pollie thinks they know at least as much, and probably more, about the economy as any economist. Economics is much more mixed up with politics than are the principles of human health.

But get this: Morrison wouldn’t have dared to accept the medicos’ advice to lock down the economy without Treasury’s assurance that it could throw together the measures – particularly JobKeeper and the JobSeeker supplement – that would hold most of the show together until the economy could be unlocked. As has happened. Treasury is back in the good books.

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Why economists get so many of their predictions wrong

Sometimes the study of economics – which has gone on for at least 250 years – can take a wrong turn. Many economists would like to believe their disciple is more advanced than ever, but in the most important economics book of 2020 two leading British economists argue that, in its efforts to become more “rigorous”, it’s gone seriously astray.

The book is Radical Uncertainty: Decision-making for an unknowable future, by Professor John Kay of Oxford University and Professor Mervyn King, a former governor of the Bank of England.

The great push in economics since World War II has been to make the subject more rigorous and scientific by expressing its arguments and reasoning in mathematical equations rather than words and diagrams.

The physical sciences have long been highly mathematical. Economists are sometimes accused of trying to distinguish their discipline from the other social sciences by making it more like physics.

Economics is now so dominated by maths it’s almost become a branch of applied mathematics. Sometimes I think that newly minted economics lecturers know more about maths than they do about the economy.

Kay and King don’t object to the greater use of maths (and I think economists have done well in using advanced statistical techniques to go beyond finding mere correlations to identifying causal relationships).

But the authors do argue that, in their efforts to make conventional economic theory more amenable to mathematical reasoning, economists have added some further simplifying assumptions about the way people and businesses and economic policymakers are assumed to behave which take economic theory even further away from reality.

They note that when, in 2004, the scientists at NASA launched a rocket to orbit around Mercury, they calculated that it would travel 4.9 billion miles and enter the orbit in March 2011. They got it exactly right.

Why? Because the equations of planetary motion have been well understood since the 17th century. Because those equations describing the way the planets move are “stationary” – meaning they haven’t changed in millions of years. And because nothing that humans do or believe has any effect on the way the planets move.

Then there’s probability theory. You know that, in games of chance, the probability of throwing five heads in a row with an unbiased coin, or the probability that the next card you’re dealt is the ace of spades can be exactly calculated.

In 1921, Professor Frank Knight of Chicago University famously argued that a distinction should be drawn between “risk” and “uncertainty”. Risk applied to cases where the probability of something happening could be calculated with precision. Uncertainty applied to the far more common cases where no one could say with any certainty what would happen.

Kay and King argue that economics took a wrong turn when Knight’s successor at Chicago, a chap called Milton Friedman, announced this was a false distinction. As far as he was concerned, it could safely be assumed that you could attach a probability to each possible outcome and then multiply these together to get the “expected outcome”.

So economists were able to get on with reducing everything to equations and using them to make their predictions about what would happen in the economy.

The authors charge that, rather than facing up to all the uncertainty surrounding the economic decisions humans make, economics has fallen into the trap of using a couple of convenient but unwarranted assumptions to make economics more like a physical science and like a game of chance where the probability of things happening can be calculated accurately.

There’s a big element of self-delusion in this. If you accuse an economist of thinking they know what the future holds, they’ll vehemently deny it. No one could be so silly. But the truth is they go on analysing economic behaviour and making predictions in ways that implicitly assume it is possible to know the future.

Kay and King make three points in their book. First, the world of economics, business and finance is “non-stationary” – it’s not governed by unchanging scientific laws. “Different individuals and groups will make different assessments and arrive at different decisions, and often there will be no objectively right answer, either before or after the event,” they say.

Why not? Because we so often have to make decisions while not knowing all there is to know about the choices and consequences we face in the world right now, let alone what will happen in the future.

Second, the uncertainty that surrounds us means people cannot and do not “optimise”. Economics assumes that individuals seek to maximise their satisfaction or “utility”, businesses maximise shareholder value and public policymakers maximise social welfare – each within the various “constraints” they face.

But, in reality, no one makes decisions the way economic textbooks say they do. Economists know this, but have convinced themselves they can still make accurate predictions by assuming people behave “as if” they were following the textbook. That is, people do it unconsciously and so behave “rationally”.

Kay and King argue that people don’t behave rationally in the narrow way economists use that word to mean, but neither do they behave irrationally. Rather, people behave rationally in the common meaning of the word: they do the best they can with the limited information available.

Third, the authors say humans are social animals, which means communication with other people plays an important role in the way people make decisions. We develop our thinking by forming stories (“narratives”) which we use to convince others and to debate which way we should jump. We’ve built a market economy of extraordinary complexity by developing networks of trust, cooperation and coordination.

We live in a world that abounds in “radical” uncertainty – having to make decisions without all the information we need. Rather than imagining they can understand and predict how people behave by doing mathematical calculations, economists need to understand how humans press on with life and business despite the uncertainty - and usually don’t do too badly.

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Deeper causes of America's troubles are economic and social

The older I get the more I prefer movies where nothing much happens. I’m increasingly impatient with car chases, gunfights and sword fights. I like movies that look at people’s lives and the way their relationships develop. Truth be told, I prefer escapist movies, but make an exception for those that help me better understand the difficulties encountered by people living in circumstances very different to mine. They may not be much fun, but they are character-building.

I put Frances McDormand’s memorable Nomadland in that category. If you want to understand how the richest, smartest, most “advanced” civilisation in the world could be tearing itself apart before our very eyes, Nomadland is an easy place to start.

McDormand plays an older woman who, having recently lost her husband, finds the global financial crisis and its Great Recession have caused her to lose her job, her home and even the small company town she’s lived in for years.

She fits out a second-hand campervan and takes off on the roads of middle America in search of somewhere to earn a bit of money and somewhere to camp for a few weeks that doesn’t cost too much.

It’s a solitary life, but slowly she makes casual friendships with a whole tribe of other older nomads moving around in search of unskilled casual work. The climax comes when her van breaks down and she must return to suburbia to beg her sister for a loan so she can keep on the move.

It’s a fictionalised version of a non-fiction book, Nomadland: Surviving America in the Twenty-First Century. In the hands of the film’s director, it becomes a story of human resilience, how McDormand’s character and the other nomads learn to adapt and survive. According to the reviews, the movie glosses over the book’s criticism of the poor treatment and payment of people working at a huge Amazon warehouse.

For a harder-nosed expose of life on the margins of America’s mighty economy, I recommend the recent work of the Nobel prize-winning Scottish American economist, Sir Angus Deaton. With his wife Anne Case, another distinguished economics professor from Princeton University, Deaton has obliged Americans to acknowledge an epidemic that’s been blighting their society for two decades, the ever-rising “deaths of despair” among working-class white men.

These are deaths by suicide, alcohol-related liver disease and accidental drug overdose. Much of the problem is the opioid crisis, in which increased prescription of opioid medications – which the pharmaceutical companies had assured doctors were not addictive – led to widespread misuse of both prescription and non-prescription opioids and many fatal overdoses.

Deaton and Case found that these deaths of despair had risen from about 65,000 a year in 1995 to 158,000 in 2018 and 164,000 in 2019. This increase is almost entirely confined to Americans – particularly white males – without a university degree.

While overall death rates have fallen for those with full degrees, they’ve risen for less-educated Americans. Amazingly, life expectancy at birth for all Americans fell between 2014 and 2017 – the first three-year drop since the Spanish flu pandemic. It rose a fraction in 2018, as the authorities finally responded to the opioid crisis.

Deaton and Case have found that, after allowing for inflation, the wages of US men without college degrees have fallen for 50 years, while college graduates’ earnings premium over those without a degree has risen by an “astonishing” 80 per cent.

With the decline in employment in manufacturing caused by globalisation and, more particularly, automation, less-educated Americans have become increasingly less likely to have jobs. The share of prime-age men in the labour force has trended downwards for decades.

Despite losing the popular vote to Hillary Clinton in 2016, Donald Trump won more votes in the Electoral College partly because most Republicans held their nose and voted for him, but mainly because three or four smaller midwest “rust bucket” states – still suffering from the loss of less-skilled jobs in the Great Recession – switched from the Democrats to the man who promised to give the establishment a big kick up the bum. (Instead, he gave it big tax cuts and more deregulation.)

So Trump is more a symptom than a cause of America’s long-running economic and social decay. Which doesn’t change the likelihood that his woeful mismanagement of the coronavirus pandemic will add to the economic and social causes of deaths of despair.

Deaton and Case say the pandemic has exposed and accelerated the long-term trends that will render the US economy even more unequal and dysfunctional than it already was, further undermining the lives and livelihoods of less-educated people in the years ahead.

In the pandemic, many educated professionals have been able to work from home – protecting themselves and their salaries – while many of those who work in services and retail have lost their jobs or face a higher risk of infection doing them.

“When the final tallies are in, there is little doubt that the overall losses in life and money will divide along the same educational fault line,” they conclude.

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Why much of what we're told about taxes is off beam

There are lots of ways to describe the subject matter of economics, but the ponciest way is to say it’s about “the study of incentives”. It’s true, but a less grandiose way to put it is that conventional economists are obsessed by prices and not much else.

If you’ve heard someone being accused of knowing “the price of everything, but the value of nothing”, that phrase could have been purpose-built for economists. Read on and you’ll see why economists so often make bad predictions and give bum advice.

The early weeks of most courses in economics are devoted to explaining the economists’ version of how markets work. How the demand for a particular good or service interacts with the supply of the particular item to determine its price.

Over time, movements in the price act as signals to both the buyers of the product and its sellers. A rise in the price tells buyers they should use the now more-expensive product less wastefully, and maybe start looking for some alternative product that’s almost as good but doesn’t cost as much. On the other hand, a fall in the price tells buyers to bog in.

To the sellers, however, the price signals sent by a price change are reversed. A price rise says: this product's now more profitable, produce more; a fall in the price signals that supply is now less profitable, so produce less.

You can see how changes in the price act as an incentive for buyers and sellers to change their behaviour.

You see too how, following some disturbance, this “price mechanism” acts to return the market for the product to “equilibrium” – balance between the supply of it and the demand for it. It sets off what real scientists call a “negative feedback loop”: when prices rise, it acts to bring them back down by reducing demand and increasing supply; when prices fall, it brings them back up by reducing supply and increasing demand.

Note that all this is about changes in relative prices – the price of one product relative to the prices of others. It ignores inflation, which is a rise in the level of prices generally.

The way economists think, taxes are just another price. And there’s no topic where people worry more about the effect of incentives than taxes – particularly the effect of income tax on the incentive to work.

Consider this experiment, conducted in 2018 by two (married) economists from the Massachusetts Institute of Technology, Esther Duflo and Abhijit Banerjee, with Stefanie Stantcheva of Harvard. Duflo and Banerjee were awarded the Nobel prize in economics in 2019.

The three surveyed 10,000 people from all over America, asking half of them questions about how people would react to several financial incentives. Half of these respondents said they expected at least some people to stop working in response to a rise in the tax rate, and 60 per cent expected people to work less.

Almost half of the 5000 respondents expected the introduction of a universal basic income of $US13,000 ($17,000) a year, with no strings attached, to lead people to stop working. And 60 per cent thought a Medicaid program (providing healthcare for people on low incomes) with no work requirement would discourage people from working.

But here’s the trick: the economists asked people in the other half of their 10,000 sample the same questions, but how they themselves would react, not how they thought other people would. Their responses were significantly different, with 72 per cent of them declaring that an increase in taxes would “not at all” lead them to stop working.

As Duflo and Banerjee summed it up in their book, Good Economics for Hard Times, and in an excerpt in the New York Times, “Everyone else responds to incentives, but I don’t”.

It’s possible those people could be deluding themselves – after all, most people believe they’re not influenced by advertising, when it’s clear advertising works – but in this case the hard evidence shows financial incentives aren’t nearly as influential as is widely assumed.

The first place to see this is among the rich. “No one seriously believes that salary caps lead top athletes to work less hard in the United States than they do in Europe, where there is no cap. Research shows that when top tax rates go up, tax evasion increases . . . but the rich don’t work less,” they say.

And we see it among the poor. “Notwithstanding all the talk about ‘welfare queens,’ [and the use our Morrison government has made of similar talk to justify keeping the JobSeeker dole payment low] 40 years of evidence shows that the poor do not stop working when welfare becomes more generous,” they say.

“When members of the Cherokee tribe started getting dividends from the casino on their land, which made them 50 per cent richer on average, there was no evidence that they worked less.”

It’s true that in many circumstances – but not something as deeply consequential as decisions about how much work to do – differences in prices will influence the choices people make. In a supermarket, for instance, many shoppers will reach for the cheaper jar of peanut butter.

But when we’re making decisions about bigger and more consequential issues – such as whether to work and how much of it to do – monetary incentives such as the rate of tax on it, go into the mix with a multitude of other, non-monetary incentives.

Such as? “Something we know in our guts: status, dignity, social connections. Chief executives and top athletes are driven by the desire to win and be the best. The poor will walk away from social benefits if they come with being treated like a criminal. And among the middle class, the fear of losing their sense of who they are,” Duflo and Banerjee conclude.

Why do economists so often make bad predictions and give bum advice? Because they keep forgetting that a model of economic behaviour that focuses so heavily on prices leaves out many other powerful incentives.

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Now's a good time to work on your rules to live by

The week between Christmas and new year is unique among the 52, a week of no great consequence, a kind of no man’s land between the end of the old year and the start of the new. Not a gap year, but a gap week. A week where all the sensible people are on leave and having fun with the family, while the few who must work while others play hope there won’t actually be much work and no one will mind if they skive off early.

But I’ve always found it a good time for reflection and taking stock. What were my great achievements in the year just past – if any? And what are my grand plans for achievement in the coming year?

A few days ago I happened upon a list of "17 Things I Believe", written by the American management professor Robert Sutton, which I put away a decade ago because I believed so many of his 17. Some of them are useful for anyone using this week for a little reflection.

Let’s start with number 14: "Am I a success or a failure?" is not a very useful question.

That’s because all of us are both a success and a failure. Successful in some aspects of our life and less successful in others. Good at making money, for instance; less good as a spouse and parent.

If so, see number 17: Work is an overrated activity.

Many men do need to find a healthier balance between work and family. They need to stop kidding themselves that sending their kids to an expensive school and buying their loved ones expensive presents is a satisfactory substitute for their presence and attention.

More generally, however, the school of "positive" psychologists says that, rather than always focusing on fixing your weaknesses, you make more progress if you concentrate on getting the best from your strengths.

But Sutton has his own twist. "Rather than fretting or gloating over what you’ve done in the past (and seeing yourself as serving a life sentence as a winner or loser)," he says, "the most constructive way to go through life is to keep focusing on what you learn and how you can get better in the future."

This ties in with number 8: Err on the side of optimism and positive energy in all things.

Yes, a much happier way to live your life.

And it leads on to number 5: You get what you expect from people. This is true when it comes to selfish behaviour; unvarnished self-interest is a learnt social norm, not an unwavering feature of human behaviour.

This really chimes with my experience. I’ve found it particularly true of bosses. If they can see that you expect them to give you a square deal because they’re a decent person, they most likely will if it’s within their power.

That’s because of a person’s natural desire to meet the other person’s expectations of them. Hold them to a high standard and they’ll rise to it. But let them see you distrust them and half expect to be cheated, and they’re unlikely to dash your expectations.

Another one I really like is number 7: The best test of a person’s character is how he or she treats those with less power. Or, as I prefer to say after too much Downton Abbey, how you treat the servants. The taxi drivers, shop assistants, receptionists and executive assistants trying to stop you getting through to their boss.

It’s a test I apply in retrospect to my own behaviour, and often don’t pass.

Now here’s a better one for this time of year, number 9: It is good to ask yourself, do I have enough? Do you really need more money, power, prestige or stuff?

Like many economists always have, in this age of hyper-materialism and vaulting ambition it’s easy to assume more is always better. It often isn’t, particularly when quantity comes at the expense of quality. Nor when we use cost as a measure of quality.

I think the world would be a nicer, less frantic, more generous, less unequal and, above all, more enjoyable place to live if our politicians and business people put more emphasis on making things better rather than bigger. (And by quality I don’t mean striving for an all-Miele kitchen.)

Sometimes I think top executives strive for ever-higher remuneration because they don’t get much satisfaction from the jobs they do. They’d be better off themselves if they put more emphasis on making sure their staff had more satisfying and reasonably paid jobs, and their customers always got value for money.

Which brings us back to work. There is more to life than work, but since work takes up so much of our lives, I think the secret to a better life is to keep wriggling around until you find a job that’s satisfying. And a business full of satisfied workers – from the boss down – should still be one that makes a big profit. That is, big enough.

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Evil Lord Keynes flies to rescue of disbelieving Liberals

When we entered lockdown in March this year, many people (including me) pooh-poohed Scott Morrison’s assurance that the economy would “snap back” once the lockdown was lifted. Turned out he was more right than wrong. Question is, why?

Two reasons. But first let’s recap the facts. About 85 per cent of the jobs lost in April and May had been recovered by November, with more likely this month. It’s a similar story when you look at the rebound in total hours worked per month (thereby taking account of underemployment).

In consequence, the rate of unemployment is expected to peak at 7.5 per cent – way lower than the plateaus of 10 per cent after the recession of the early 1980s and 11 per cent after the recession of the early 1990s. And the new peak is expected in the next three months.

At this stage, the unemployment rate is expected to be back down to where it was before the recession in four years. If you think that’s a terribly long time, it is. But it’s a lot better than the six years it took in the ’80s, and the 10 years in the ’90s.

We’ve spent most of this year telling ourselves we’re in the worst recession since World War II. Turns out that’s true only in the recession’s depth. Never before has real gross domestic product contracted by anything like as much as 7 per cent – and in just one quarter, to boot.

But one lesson we’ve learnt this year is that, with recessions, what matters most is not depth, but duration. Normally, of course, the greater depth would add to the duration. But this is anything but a normal recession. And, in this case, it’s the other way round: the greater depth has been associated with shorter duration.

Of course, the expectation that this recession will take just four years to get unemployment back to where it was is just a forecast. It may well be wrong. But what we do have in the can is that, just six months after 870,000 people lost their jobs, 85 per cent of them were back in work. Amazing.

So why has the economy snapped back in a way few thought possible? First, because this debt-and-deficit obsessed government, which would never even utter the swearword “Keynes” - whom the Brits raised to the peerage for his troubles - swallowed its misconceptions and responded to the lockdown with massive fiscal (budgetary) stimulus.

The multi-year direct fiscal stimulus of $257 billion (plus more in the budget update) is equivalent to 13 per cent of GDP in 2019-20. This compares with $72 billion fiscal stimulus (6 per cent of GDP) applied in response to the global financial crisis – most of which the Liberals bitterly opposed.

Some see Morrison’s about-face on the question of fiscal stimulus as a sign of his barefaced pragmatism and lack of commitment to principle. Not quite. A better “learning” from this development is that conservative parties can afford the luxury of smaller-government-motivated opposition to using budgets (rather than interest rates) to revive economies only while in opposition, never when in government.

At the heart of Morrison’s massive stimulus were two new, hugely influential, hugely expensive and hugely Keynesian temporary “automatic budgetary stabilisers” - the JobKeeper wage subsidy and the supplement to JobSeeker unemployment benefits.

But the second reason the rebound is stronger than expected is that, while acknowledging the coronacession’s uniqueness, economists (and I) have been too prone to using past, more conventional recessions as the “anchor” for their predictions about how the coronacession will proceed.

We’ve forgotten that, whereas our past recessions were caused by the overuse of high interest rates to slowly kill off a boom in demand over a year or more, the coronacession is a supply shock – where the government suddenly orders businesses (from overseas airlines to the local caff) to cease trading immediately and until further notice, and orders all households to leave their homes as little as possible.

It’s this unprecedented supply-side element that means economists should never have used past ordinary demand-side recessions as their anchor for predicting the coronacession’s length and severity.

Whereas normal recessions are economies doing what comes naturally after the authorities hit the brakes too hard, the coronacession is an unnatural act, something that happened instantly after the flick of a government switch.

Morrison believed that, as soon as the government decided to flick the switch back to on, the economy would snap back to where it was. Thanks to his massive fiscal stimulus and other measures – which were specifically designed to stop the economy from unwinding while it was in limbo – his expectation was 85 per cent right.

But there’s a further “learning” to be had from all this. In a normal recession, a recovery is just a recovery. Once it’s started, we can expect it to continue until the job’s done, unless the government does something silly.

But this coronacession is one of a kind. What we’ve had so far is not the start of a normal recovery, but a rebound following the flick of the lockdown switch back to “on”. It has a bit further to run, with the leap in the household saving rate showing that a fair bit of the lockdown’s stimulus is yet to be spent.

Sometime next year, however, the stimulus will stop stimulating demand. Only then will we know whether the rebound has turned into a normal recovery. With wage growth still so weak, I’m not confident it will.

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Working from home takes us back to the future

If there’s one good thing to come from this horrible year, surely it’s the breakthrough on WFH – working from home. This wonderful new idea – made possible only by the wonders of the internet – may have come by force, but for many of us it may be here to stay.

If so, it will require a lot of changes around the place, and not just in the attitudes and practices of bosses and workers. With a marked decline in commuting – surely the greatest benefit from the revolution – transport planning authorities will have to rethink their plans for more expressways and metro transport systems.

If we’re talking about fewer people coming into the central business district and more staying at home in the suburbs, over time this will mean a big shift in the relative prices of real estate. For both businesses and families, CBD land prices and rents will decline relative to prices and rents in the suburbs.

In big cities like Melbourne and Sydney, as so many jobs have moved from the suburbs to office towers in the CBD and nearby areas, the dominant trend in real estate has gone from position, position, position to proximity, proximity, proximity. Everyone would prefer to live closer to the centre.

If you measure the rise in house prices over the years, you find the closer homes are to the GPO, the more they’ve risen, with prices in outer suburbs having risen least.

But if WFH becomes lasting and widespread, that decades-long trend could be reversed. If you don’t have to spend so much time commuting, why not live further out, where bigger and better homes are more affordable and there’s more open space?

Maybe apartment living will become less attractive compared to living in a detached house with a garden, with a corresponding shift in relative prices. And if we’re going to be working at home as a regular thing, maybe we need an extra bedroom to use as a study.

It’s interesting to contemplate. But before we get too carried away, let’s remember one thing: in human history, there’s nothing new about working from home. Indeed, when you think about it you realise humans have spent far more centuries working at home than not.

We’ve been working from home – not having a factory or office to go to – since we were hunters and gatherers. That was all the millennia before the beginning of farming about 10,000 years ago.

In all the years before the start of the Industrial Revolution in Britain in the 1760s, most people earned their living from farming, and farming was done next to – and sometimes inside – the hovels of peasant workers or, in less feudal times, the homesteads of farmers.

You know that in Europe and other cold climes, families lived with their farm animals during winter. Much work would have been done in nearby sheds.

In the Middle Ages, most tradespeople worked at home. Blacksmiths, carpenters, leather workers, bakers, seamstresses, shoemakers, potters, weavers and ale brewers made their goods in their homes and sold them from their homes.

This was work suitable for women as well as men, and it could be combined with childcare and other, income-earning farm work.

In the early days of capitalism, from the 1600s to until well into the Industrial Revolution, much use was made of the “putting-out” system, as The Economist magazine describes in a recent issue.

“Workers would collect raw materials, and sometimes equipment, from a central depot. They would return home and make the goods for a few days, before giving back the finished articles and getting paid,” it says.

“Workers were independent contractors: they were paid by the piece, not by the hour, and they had little if any guarantee of work week to week.”

Is this ringing any bells?

Being economists, the magazine notes that when Adam Smith wrote The Wealth of Nations, in 1776, it was perfectly common to work from home. Smith famously described the operation of the division of labour in pin-making – not in a dark satanic mill but a “small manufactory” of perhaps 10 people, which could well have been attached to someone’s house.

Eventually, however, the putting-out system gave way to full-on manufacturing in factories – despite the resistance of the machine-smashing Luddites who preferred the old ways.

The move to factories was an inevitable consequence of the development of bigger and better machines in the unending pursuit of economies of scale. Workers moved from the farm to the factory and then, as technological advance continued, from highly automated factories to city offices and, eventually, sitting at a desk staring at a screen.

It’s economic development and the pursuit of ever-greater material prosperity that opened the geographic divide between home and work. Which is not to say that further technological change – including the advent of Slack and Zoom – can’t make it possible to bring them back together for many, though obviously not all, workers. Provided, of course, that’s what workers and, more significantly, bosses see as being to their advantage.

Here, too, it’s worth remembering a bit of history. The Economist notes that, according to some economic historians, workers were exploited under the putting-out system. Those who owned the machines and raw materials enjoyed enormous power over those whose labour they used.

It was difficult for workers spread across the countryside to team up against the bosses and their take-it-or-leave-it offers. Crammed into a big factory, however, workers could more easily join together to ask for higher wages. Trade unions started to grow from the 1850s onwards.

Happy speculation aside, there’s no certainty how much working from home will take on. If it does, there’s a risk that will be because bosses see it as a new way to cut costs. That really would be turning the clock back.

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Experts work overtime to take the fun out of Christmas

Feeling bad about the way the pandemic is disrupting your Christmas arrangements? Cheer up, I have good news – of a sort. Keep reading and I’ll convince you Christmas has become so “problematic” you’re probably better off not bothering this year.

A bad-to-non-existent festive season is the perfect way to top off this horrible year, leaving us confident 2021 couldn’t possibly be worse. After this, it’s all upside.

With nowhere to go and nothing better to do, I’ve been searching the internet for ways of improving on the Joy of Christmas. Having consulted the earnest academic experts, I’ve realised Christmas is a minefield of impossible dreams, dashed expectations, overspending, overindulgence and waste, all of it threatened by the risk of a family fight.

And that’s before you remember the damage to the planet – the minimisation of which so many academics seem to see as the whole point of Christmas. (I warned you they were earnest.)

But first, a consumer warning: none of the facts and figures the academics toss around so confidently comes with a money-back guarantee. Read them, be impressed, do not commit to memory.

I must start by acknowledging the seminal contribution of economists to the Yuletide Killjoy movement. One economist who shall remain nameless made his name with a journal article and then book titled The Deadweight Loss of Christmas.

His point was that, in the frequent cases where the gifter of a gift paid more for it than the giftee valued it, the difference was a “deadweight loss” – money spent that yielded no benefit to either party.

His solution was that if you must keep giving presents, stick to cash. Great. Remember, the goal of all Christmas advice is to be admonitory rather than helpful. I’m smart; you're not so.

But the purveyors of the dismal science have no monopoly over the academy’s efforts to increase the dismality of Christmas. The charge is now being led by, of all people, the marketing experts, themselves led by Dr Adrian Camilleri of the University of Technology Sydney, and Professor Gary Mortimer of the Queensland University of Technology.

Camilleri’s research into the psychology of gift-giving finds there are two potentially conflicting goals. First is to make the recipient happy, which mostly depends on whether the gift is something they want.

Second is to strengthen the relationship between giver and recipient. This is achieved by giving a thoughtful and memorable gift – one that shows the giver really knows the recipient. “Usually this means figuring out what someone wants without directly asking,” Camilleri says.

See the problem? Asking them what they want is the way to achieve high marks on desirability, but yields a fail on communicating thoughtfulness.

But now we step up the analysis (stop me if I’m going too fast). Camilleri sets up a matrix, showing the four quadrants made when you account for degrees of thoughtfulness and then degrees of desirability.

In the top left-hand quadrant – unthoughtful and undesired – would be a gift of, say, a pair of socks. The top right-hand quadrant – unthoughtful and desired – would be, say, a gift of money. In the bottom left-hand quadrant – undesired but thoughtful – would be a present you’d never imagined getting, but quite liked. In the bottom right-hand box is a gift that’s both desired and thoughtful.

See how high are the chances of giving a present that misses the mark? “This is why buying a gift can be so anxiety-inducing,” he says. “There is a ‘social risk’ involved.”

But isn’t it the thought that counts? Not as much as you think. Research shows gift-givers tend to overestimate how well unsolicited gifts will be received. Research also shows people tend to overestimate their ability to discern what a recipient will like.

As well, gift-givers tend to overestimate the extent to which more expensive gifts will be received as being more thoughtful. Turns out recipients appreciate expensive and inexpensive gifts similarly.

And they actually feel closer to those who give convenient gifts such as a gift certificate for a nearby, ordinary restaurant, rather than a distant, flash restaurant.

Mortimer and colleagues warn against the evil of giving for giving’s sake. They report that $400 million unwanted presents were given in Christmas 2018, comprising about 10 million items, many of which probably went to landfill. Topping the unwanted list were (in order) novelty items, candles, pamper products, pyjamas or slippers and underwear or socks.

“The shopping frenzy is not good for the planet. It generates a mountain of waste, including plastics, decorations, wrapping paper and party paraphernalia only used once. It also involves thousands of air and road miles to transport goods, which creates up to 650kg of carbon dioxide per person," we're told.

Which brings us to overeating. Under the heading of “How not to give the gift of food guilt this holiday season”, Dr Kelly McGonigal, a psychologist at California’s Stanford University, asks: “Are you overloading your loved ones with indulgent treats they’ll regret?”

I tell you, we’re much better out of the whole thing.

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