One of my resolutions this year is to spend more time trying to prevent lobby groups from using dodgy economic "modelling" to mislead my readers. Canberra has developed a bad case of modelling mania, but most of it is dubious. The less you know about modelling, the more it impresses you.
Any day of the week you can hear politicians demanding to see the modelling behind some figure the government has produced (even if Treasury did a quick calculation on the back of an envelope).
But the worst offenders are business interests, which pay big money to Canberra economic consultants to produce supposedly independent reports aimed at persuading governments to give them something, or at persuading the public to stop the government taking something from them.
One trick they often pull is trying to make their industry sound bigger and better for the economy than it is. Just last week the Minister for Manufacturing, Kim Carr, was defending the government's grants to the car industry by claiming it provides employment to 46,000 workers and "more than 200,000 in associated jobs".
But the industry that's been trying hardest to bolster its economic importance lately is mining. According to a press release issued by the Australian Mines and Metals Association, "213,200 people are directly employed in mining, oil and gas operations in Australia, with an additional 639,600 indirect jobs created by the resource industry".
Did you notice how the second of those suspiciously precise figures was precisely three times the first? "Spurious accuracy" is one of the signs a con job is in progress.
I'm sure you've seen the ads sponsored by the Minerals Council of Australia and others telling "Our Story" about what a wonderful, caring industry it is. The related website says that "across the nation, mining employs 187,400 people directly, and a further 599,680 in support industries". So for every mining job, another 3.2 are created elsewhere.
According to a report funded by Peabody Energy, "the Australian coal industry employs over 32,000 people and indirectly creates an additional 126,000 jobs in Queensland and New South Wales". So that's an employment "multiplier" of 3.9.
Where do these figures come from? Knowing how many people are employed in a particular industry isn't hard. Every month the Bureau of Statistics conducts a giant sample survey of households, asking them about their experience in the labour market. That's where our monthly figures for employment and unemployment come from. Every third month the bureau asks people what industry they work for.
It's obvious that all industries buy materials and other "inputs" from other industries, to which they then apply a lot of labour and equipment to produce whatever goods or services are their "output". So every industry can justly claim its purchases from other industries create jobs in those industries. Many could claim to create more jobs indirectly than directly.
But how do they know how many? They pay an economic consultant to do a report that tells them. How do the consultants know? They look up the industry's multiplier in a model-based document produced by the bureau called the input-output tables.
Trouble is, the tables are subject to significant limitations, which make it easy for them to be misused. All is explained in a paper by Dr Richard Denniss, of the Australia Institute, to be released today, The Use and Abuse of Economic Modelling in Australia: Users' Guide to Tricks of the Trade.
Like all models, the bureau's input-output model is built on a host of assumptions, as the bureau acknowledges in its accompanying documents. This reliance on assumptions shouldn't surprise you. Were you to work out a household budget for the year, you'd have to make many assumptions, including about what will happen to prices in the future.
Denniss reminds us of the key assumptions: that the relationships between inputs and outputs are fixed and so unaffected by changes in technology or changes in the relative prices of inputs; that all the output of an industry is identical, with no differences in quality or features; and that increasing the quantity of the industry's output would yield no economies of scale.
These unrealistic - but unavoidable - assumptions greatly limit the use you can make of employment multipliers without misleading yourself or others. You can't assume that doubling the size of an industry (such as mining) would also double the number of jobs it created directly and indirectly. Nor can you assume that a significant reduction in the size of an industry (such as car making) would mean the same reduction in total employment.
Another problem is that the employment multipliers involve double counting - more than one industry taking the credit for "creating" a job in some other industry. Denniss finds that if you used the multipliers to calculate the jobs directly and indirectly created by each Australian industry, then added them up, the total would be 187 per cent of all the jobs in the nation.
Yet another problem is the implication that the significant expansion of an industry would do nothing but add to employment in the industry and elsewhere. This assumes such an expansion would have no effect on wage rates, skill shortages, the exchange rate and much else.
Denniss quotes the results of some quite different modelling commissioned by the proponents of what would be one of the world's largest mines, the China First mine in Queensland. It found that, though the mine would lead to 6000 new jobs, it would also lead to the loss of about 3000 jobs, most of them in manufacturing.
We should be highly sceptical about claims made by interest groups on the basis of reports
from "independent" consultants with no acknowledgment of all the hidden assumptions.
