The prospect for workers is brighter than many think

A lot of people are convinced it's just going to get worse and worse for workers in coming years. A lot of oldies think that and, unfortunately, too many youngsters believe them.

Many older people worry that, with the decline of manufacturing in Australia, and the end of the mining boom as well, they just can't see where the jobs will come from.

Young people, on the other hand, believe jobs are getting ever harder to find and, when you do find one, it's likely to be pretty scrappy: casual, part-time, short-term.

What's true is that young people have borne the brunt of the weak economic and hence employment growth since the financial crisis in 2008.

It's taking them longer to find entry-level full-time jobs than it used to and, in the meantime, they've had to get by with casual jobs. More employers have been willing to exploit them by asking them to do unpaid internships.

What's not true is that there's been continuing growth in insecure forms of employment. The proportions of such jobs haven't been increasing.

At a time of "transition" and uncertainty, it's always easy to err on the gloomy side. When you do, be sure the media will broadcast your bad vibes to the world.

But it's not hard to see plausible reasons why things could get better for workers, not worse. And when the ANZ Bank's chief economist unit and the Australian Institute for Business and Economics, at the University of Queensland, peered into the future and ran their best guesses through a model of the economy, that's just what they found.

Everyone loves to dwell on the decline in manufacturing, and the pathetic number of lasting jobs in mining, but few people get excited by the truth that almost all the additional jobs we've created in the past 40 years have been in the services sector.

Nor that most of these jobs have been cleaner, safer, more highly skilled and more rewarding – intellectually as well as monetarily – than most of the jobs no longer being created in manufacturing, farming and mining.

The study makes the highly plausible assumption that this longstanding trend will continue. "Declining material intensity has been observed in all [developed] countries, in part because wealthier consumers buy 'experiences' once their primary material needs are met," it says.

The ageing of the population is almost invariably portrayed as a bad thing, but the study points to a widely ignored way in which it's good news for the younger generation.

With a higher proportion of the population retired (and thus adding to the demand for labour but not to its supply) but low fertility meaning a lower rate of young people entering the workforce from education, demand for the services of young workers will increase.

Here's a tip: employers are chancers​. If they think they can get away with screwing workers (because there are more than enough available) they will. That's what's been happening lately.

But if they don't think they can get away with it (because workers have plenty of other bosses who'd like their services), they don't. And if it gets to the point where bosses have to start sucking up to workers to attract them and hold them, they will.

The study puts it more politely. By their nature, service industries rely less on machines and more on people, particularly highly-skilled workers. So if the services sector's share of the economy continues to grow "this could prove challenging for Australian businesses given our ageing population and changing workforce composition".

A third factor the gloom-mongers neglect is that our continuing move to the "knowledge economy" requires a better-educated, more highly-qualified workforce.

Today, more than half the population has completed the last year of schooling and gained at least a post-school certificate. That's more than twice what it was in 1981.

Since the oldest Australians have the lowest levels of educational attainment, the proportion of people with post-school qualifications could exceed 70 per cent by 2030.

Even so, the study predicts that "the fight to retain skilled workers will intensify", implying that, though the supply of qualified workers will grow, the demand for their services will grow faster.

In such circumstances, employers will be trying to bind their skilled workers to them, not cast them adrift with insecure employment contracts.

If we foresee further growth in the share of the economy accounted for by labour-intensive service industries, employing better qualified and higher-paid workers – over whose bodies employers are fighting – labour's share of national income should rise.

If so, "some of the consequences of a falling labour share, such as growing income inequality, may begin to unwind as well", the study says.

A final factor to remember is that our exports of services are likely to keep growing as Asia's middle class gets bigger and more prosperous.

At present, the goods sector of the economy (agriculture, mining, manufacturing and construction) accounts for 28 per cent of total employment, while the services sector accounts for 72 per cent. The study predicts that, over the next 15 years, the services share will increase by 5 percentage points.

It finds that the industries with the most intensive demand for labour are also those with the strongest growth prospects.

The strongest growing service industries are likely to be healthcare (fed by demand for new medical technologies as well as ageing), education (growing demand for qualifications) and professional services.

These industries are projected to grow by at least 5 per cent a year, on average, over the next 15 years. Demand for labour across the economy is projected to grow by an average of a solid 1.6 per cent a year.

No one – certainly, no economist – knows what the future holds. But don't be led into assuming the only things that could happen are bad.

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An independent assessment on negative gearing

Labor claims its "reforms" to "negative gearing" would do wonders to make home ownership more affordable for our kids. But Malcolm Turnbull says vote for high-taxing Labor and the value of your home will crash, while rents soar.

Many voters have strong views for or against negative gearing. But when rival politicians fall to arguing about their policies, most of us find we don't know enough to decide who's right.

We need someone we can trust to act as a kind of umpire, pronouncing on who has the better case. So we're fortunate to have John Daley and Danielle Wood, of the independent Grattan Institute, issuing a report on the topic.

For defenders of negative gearing, it's bad news. The pair explain that there's a good case for acting against the practice, dismissing alarmist claims it would disrupt the property market.

For opponents of negative gearing, however, the news isn't as good as it seems. Since the resulting reduction in house prices isn't likely to be great, acting against the practice wouldn't do much to make home ownership more affordable.

Investment in a rental property is negatively geared when so much of the cost of the property has been borrowed that the interest bill and other expenses exceed the earnings from rent.

Why would anyone deliberately structure an investment to run at a loss? Partly because they can deduct that loss from their income from other sources, thus reducing their tax.

But that means they're still out of pocket for the remaining half or more of the loss. Why do that? Because they're hoping eventually to sell the place at a big capital gain, which should more than make up for the after-tax losses they've incurred.

That's been more likely since 1999, when the Howard government introduced a 50 per cent discount on the rate of tax on capital gains.

Daley and Wood disprove the dishonest claims that negative gearing is used by many people on modest incomes to get ahead. There may be a few of them, but the statistics show high income earners claim the lion's share of the benefits.

The authors say there's no point of principle that supports our longstanding practice of allowing losses on property investments to be charged against wage income for tax purposes.

Very few other countries do this. It makes the housing market more volatile and reduces home ownership. It diverts capital from more productive investments while doing little to increase the supply of homes.

They propose allowing losses on property investments to be deducted only against income from other investments, not against wages. This would save the budget $2 billion a year in the short term, falling to $1.6 billion a year as behaviour changes.

But much of the attraction of negative gearing comes from its connection with the 50 per cent discount on the taxing of capital gains.

They say there is a case for taxing capital gains more lightly than other income – mainly because much of the seeming gain comes just from the effect of inflation, which makes it illusory – but this doesn't justify a discount as great as 50 per cent.

Allowing such a high discount (as well as allowing rental losses to be deducted against wage income) greatly reduces the government's tax collections, meaning it has to rely more heavily on other taxes. Those other taxes often do more to distort economic behaviour than taxing saving does.

In any case, empirical evidence shows people on high incomes save almost as much regardless of the tax rate. Measures intended to encourage saving mainly influence the vehicle through which wealthy people save – superannuation or property or a bank account, for instance.

As well, the high discount on capital gains tax creates opportunities for artificial transactions to reduce tax and encourages investors to focus too much on speculative investment – sit back and wait for capital gains to accrue – rather than investment that earns annual income by producing goods and services.

Daley and Wood propose halving the capital gains discount to 25 per cent. This would save the budget about $3.7 billion a year.

These policy proposals may sound the same as Labor's, but there are important differences. Labor promises that, for new investments undertaken from July 1 next year, deduction of losses against wage income will be permitted only for investments in newly built homes.

Investments made before then will be unaffected, while losses on new investments in shares or existing properties may still be deducted against other investment income.

Labor promises to cut the capital gains discount to 25 per cent for all assets bought after July 1, 2017. All investments made before then will be unaffected.

Daley and Wood criticise both proposals. Retaining existing negative gearing rules for prospective investments in newly built homes adds a new distortion that would, they believe, do little to increase the supply of homes.

And they criticise Labor's plan to "grandfather" existing investments – for both negative gearing and the capital gains discount – leaving them unaffected by the change.

A better way to minimise disruption to the market and to the expectations of existing investors would be to apply the changes to everyone, but phase them in equally over 10 years.

If only making up our mind on the other election issues we'll face could be so easy.

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Is the world ruled by ideas or by interests?

Most economists believe John Maynard Keynes (rhymes with "brains" not "beans") was the greatest economist of the 20th century. But his most famous quote is one I've never been sure I agree with.

He claimed that "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.

"Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

"Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."

One man who definitely agrees is Barry Schwartz, a professor of psychology at Swarthmore College in Pennsylvania. He writes in his book Why We Work that, where once our ideas about human nature may have come from our parents, our community leaders and our religious texts, these days they come mostly from social science.

"In addition to creating things, science creates concepts, ways of understanding the world and our place in it, that have an enormous effect on how we think and act," Schwartz says.

"If we understand birth defects as acts of God, we pray. If we understand them as acts of chance, we grit our teeth and roll the dice. If we understand them as the product of prenatal neglect, we take better care of pregnant women."

Schwartz says that because ideas aren't objects, to be seen, purchased and touched, they can suffuse through the culture and have profound effects on people before they are even noticed.

And ideas, unlike things, can have profound effects on people even if those ideas are false.

I don't doubt that, in this, both Schwartz and Keynes are right. The social world is far too complex for any of us to really understand how it works. So we observe what's happening and then come up with theories - "models" - about how it works.

Those theories inevitably influence the way we think about the world, the way we react to it and the way we try to get some control over it.

But the world is so complex that we can have lots of different theories about it, or different aspects of it. Many of those theories will have an element of truth and an element of error.

We probably should have a toolbox full of theories, choosing to use the one that best fits the particular issue we're focusing on.

But human nature - our limited cognitive processing power - leads us to simplify things, settling on the one that seems to work best and apply to most circumstances. We remember it, and forget the others.

Often, of course, we don't do a lot of thinking about which theory is best, we just go along with the one most of the people around us seem to believe.

It's also true that the theories and models we rely on, consciously or unconsciously, become, as the sociologists say, "performative" - if enough people believe the world works in certain way and act on that belief, to some extent the world does start to work that way.

There are limits to this, of course. For a few decades economists allowed their dominant model - their group's way of thinking - to convince them the deregulation of the banks had brought us to the era of Great Moderation, of low inflation and unemployment with ever rising prosperity.

Their model blinded them to the global financial crisis that was coming and the years of economic malfunction that would follow.

There could be no more costly demonstration of the inadequacy of their theory about how the world worked.

So no argument: ideas have a huge effect on the world - for good or ill. But does that mean "the world is ruled by little else"?

I doubt it. The main rival for that title is the thing economists exalt above all else: self-interest. What happened to the rich and powerful, don't they have any influence on how the world is ruled?

The more I observe our politics, the more I see it as an unending battle between powerful interest groups. The political parties, contending for their own share of power, negotiate their way around the most powerful of the various interest groups.

The problem is the power democracy still gives to ordinary punters. Should I try to win votes by promising a royal commission, or should I keep in with the banks - and their generous donations to election funds - by promising to bash them with a feather?

So, do ideas really trump vested interests? Surely we're ruled by some combination of the two.

But the more I understand the weaknesses in the economists' dominant ideas about how the economy works and should work, the more I see what a bad predictor their model is, the more I wonder how such a flawed theory remains so dominant, largely impervious even to stuff-ups as monumental as the Great Recession.

Then a terrible thought strikes: maybe their ideas remain so influential in politics and the community because they happen to suit the interests of the rich and powerful.

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How behavioural economics got started

One night in 1975, Richard Thaler invited a bunch of his graduate economics student mates over for dinner. While they waited for the cooking to finish he put out a bowl of cashews.

But noticing everyone was getting stuck in, he decided he'd better take them away. His mates thanked him for doing it. It was a lightbulb moment for the young economist.

Why? Because the assumptions of the conventional economics they were studying said such a thing couldn't happen.

Each of us is assumed to have complete control over our appetites and urges. We eat no more cashews than we know is good for us.

We certainly don't need some agent of the Nanny State to limit our freedom by stepping in and taking the bowl away.

Were such a thing to happen, we wouldn't be pleased. We certainly wouldn't thank the perpetrator of this intervention.

So why did it happen? Because, contrary to the conventional model, all of us have problems stopping ourselves from doing things we know we'll regret. In one part of our lives or another, we have a problem with self-control.

And we're grateful rather than resentful when someone steps in to help us with our problem.

From then on the young Thaler – obviously a bit of a rebel and troublemaker – began compiling a list of what he came to call "anomalies" – things people actually did that the conventional model assumed they didn't.

Thaler tells the story of those cashews in his latest book, Misbehaving. It's an apt title because the book charts the development of a new school of economic thought known as "behavioural economics".

Behavioural economics studies the differences between the way people in the economy actually behave and the way the model assumes they do.

In deference to academic economists' obsession with mathematics – a preoccupation that began only after World War II, led by men such as Sir John Hicks, Kenneth Arrow and Paul Samuelson – younger behavioural economists search for ways to make more realistic the assumptions on which mathematical models of the economy are built.

Thaler says behavioural economics has three essential elements: bounded rationality (see below), bounded willpower (see above) and bounded self-interest – we can be more generous to others than the model assumes.

So what are the origins of "BE"? In their book, Animal Spirits, George Akerlof and Robert Shiller argue that John Maynard Keynes was the first behavioural economist.

Thaler says Keynes was "a true forerunner of behavioural finance". (Behavioural finance is the part of behavioural economics that focuses on behaviour in financial markets.)

Keynes argued that individuals' "animal spirits" – his word for their emotional responses – played an important role in their decision making. At times this could discourage business from investing, thus strengthening the case for governments to use their budgets to stimulate the economy.

Keynes wrote his magnum opus in 1936. But Thaler takes BE's origins back to the founder of economics, Adam Smith, and the less famous of his two books, The Theory of Moral Sentiments, published in 1759.

Smith was "an early pioneer of behavioural economics" because of his detailed description of problems of self-control.

A more obvious forerunner is the American academic Herb Simon who, in 1957, coined the term "bounded rationality" and was later awarded the Nobel prize in economics for his trouble.

Bounded rationality is the idea that people's ability to make "rational" – coolly calculating – decisions is limited by the information available to them, the trickiness of the decision, the brain's inadequate processing power and the time available for thinking about it.

Many people probably assume, however, that the true originator of BE is the Princeton psychologist Daniel Kahneman who, with his late partner, Amos Tversky, began in the early 1970s identifying the many "heuristics" (mental shortcuts) and biases that cause humans' decision making to be less than rational.

Behavioural economics has long been about incorporating the insights of psychology into economics. So it was no great surprise when the psychologist Kahneman was given the economics Nobel in 2002.

Thaler moved to California in 1977 to work with Kahneman and Tversky for a year, but that was because he'd already done a lot of thinking about "anomalies". His book leaves me in little doubt that he's the economist who should get most credit for establishing BE as a respectable subject for economists to study.

Thaler began writing a column about "anomalies" from the first issue of the American Economic Association's new Journal of Economic Perspectives in 1987.

In 1991 he teamed up with Shiller (who in 2013 got the Nobel for his work in behavioural finance) to organise a semi-annual workshop on behavioural finance under the auspices of the National Bureau of Economic Research.

One breakthrough in BE came when it was demonstrated that people's mental biases were systematic – that we were, in the title of Dan Ariely's book, Predictably Irrational.

If non-rational behaviour is predictable, it can and should be incorporated into economists' models.

And if people make predictable mistakes when buying shares and so forth, there ought to be scope for other investors to make a buck by betting against them.

Little wonder behavioural finance quickly gained a following in financial circles.

In economics, however, it's said that new ideas gain ascendancy "one funeral at a time". Oldies have a vested interest in preserving the received wisdom, but young academics are attracted to new and interesting ideas that seem to better explain the world.

Thaler's best-selling book with Cass Sunstein, Nudge, showing how governments can nudge people towards making more sensible decisions, led to the setting up of Britain's Behavioural Insights Team and copycat outfits in many countries, including Oz.

These days, BE is offered in most undergraduate university courses. So behavioural economics is now firmly rooted and can only grow in its influence on economists' thinking.

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Herald's move to explanatory journalism is its future

How has the Herald changed in 185 years? How should I know – I've been working for it for less than a quarter of that time. But I dare to claim that, of all the change since 1831, most of it has occurred since I started in 1974.

A few years back, at a staff function to celebrate those of us who'd hung around longer than could reasonably be expected, someone had the idea of presenting us not with a pen or a watch – I'd already had one of each – but with a framed copy of the front page of the paper on the day we started.

Sorry, but it was an uninspiring present that showed how far we've had to travel. It was grey in every sense. That was long before the Herald moved to colour printing, but not before our subeditors had abandoned their sacred duty to drain the colour out of every story before allowing it to be seen by the public.

The Herald stuck to "objective" reporting of the facts – "just the facts, ma'am" – and anything that remotely resembled an opinion – it was a beautiful sunny day, the prime minister seemed distracted, the accident was horrific – was verboten.

It was years before journalists attended university journalism courses, to be reminded that at its core the journalistic task involves subjective judgments: which events get reported and which don't; which facts get used and which don't; which stories get run and which "hit the spike"; which are reported at length and which in brief; which lead the front page and which go up the back somewhere.

It was because journalism was mere description of facts that readers didn't need to know the journalist's byline. They needed to be told only that a story had been written "by a Staff Correspondent" – that is, he (and occasionally she) had been trained by the Herald, and so could be trusted to get everything right.

Nothing of any great interest had happened the day before my first day on the job. The front page was nonetheless terribly busy, as editors crammed in as many stories as they could fit. To modern eyes the page was messy and uninviting.

That was only a few years before the Herald abandoned the unachievable struggle to be a "paper of record". Much better to focus on a smaller number of more interesting or important events – preferably ones other media didn't have – and do justice to them, illustrating them and laying them out on the page in a visually attractive way.

One thing that issue of the paper did have going for it, however: its price was 8 cents. Of course, in those days it didn't have lift-out sections on TV programs, food and restaurants, travel, health and fitness, and gig guides.

Apart from Column 8, still signed by Granny, there were few opinion columns in the paper of the mid-1970s. Comments or analysis sitting beside news reports were rare to non-existent. There were a few bylined feature articles, but for the most part opinion was restricted to unsigned editorials – or "leaders" – written on behalf of the editor.

It was only a little over two years before I was moved from economic reporting to opinion writing. At first my job was to write a leader a day, but by 1980 I was writing three columns a week. I'm still writing those columns, on the same days and the same parts of the paper.

Having checked with the Herald's historian, Gavin Souter, I think I'm safe in claiming to be the longest-serving columnist in the paper's 185 years.

This may tell you something about me, but mainly it says something about how the paper and the world in which it exists have changed. In relatively recent years the Herald – on paper and online –has become chock full of all manner of columns, comments and analyses.

Why? Partly because our marketplace has become ever more competitive. Journalists tend to focus hardest on competition from rival newspapers, but more intense competition has come from the electronic media, radio and television.

This competition started from the moment in the 1930s that radio networks began reporting their own news stories rather than reading out stories from the papers. Eventually radio began delivering news bulletins on the hour, but not before television channels made their nightly news bulletins the chief means by which Australians caught up with the news.

With so many of our readers already having heard the bare bones of so many of our news stories, is it any wonder newspapers had to change their news offering? We tried harder to find our own exclusive stories, provided greater detail and more background information, asked "the next question" – what happens now? how will the authorities react? – as well as adding more commentary and analysis, including the pure opinions of columnists and in-house experts.

For much of the past 185 years there were two things you could do after you got home from work, had dinner and wanted to relax: sing songs round the piano or read the paper. Then came radio and its serials and then the all engrossing idiot box.

On a wider level, therefore, newspapers have long faced greater competition from an ever-expanding array of ways to spend your leisure time. More reason to change our product.

The advent of the internet has added greatly to that array, as well as multiplying rival digital sources of news – not just from other cities and states, but from English-speaking news providers around the world.

By contrast, it's allowed the Herald and other papers to use their websites to get back into "breaking news" – news within minutes of it happening – for the first time since the 1930s.

These days, however, digital sources of breaking news are so plentiful and so freely available –literally – as to greatly diminish the commercial value of ordinary news. How are we to pay the wages of our journalists?

Online advertising is far cheaper than it is in newspapers and free-to-air television. What's more, online advertising is dominated by Google and Facebook, not the traditional news sources.

We need something more than ordinary news, some way of adding value to a product we can ask readers to pay for, preferably by subscription.

The material standard of living of people in the developed economies has risen many times since the Industrial Revolution. This remarkable achievement has been the result of two main factors: technological advance and ever-growing specialisation within occupations.

The inescapable consequence, however, has been to make the workings of our economy and many other aspects of our lives infinitely more complex than they were. There was a time when car owners did much of their own routine maintenance; today, many hardly dare lift the bonnet.

When I joined the Herald it still subscribed to the notion of the "universal journalist" – any Herald-trained journalist was capable of accurately reporting any story on any subject. I doubt if this was true then; it's become less true with every passing year.

Since I became economics editor in 1978, I've worked to ensure that all economic reporting is done by journalists with economic qualifications. Ideally, legal reporters have law degrees, science reporters have science degrees and so forth.

With the growing complexity of daily life has gone an ever-rising level of educational attainment in the workforce. The Herald has always had a better-paid and better-educated readership, but it's never been better educated than it is today.

This means a readership far keener to know how and why, not just who, what, where and when.

But not all "advances" have been for the better. Governments have become bigger, ministers' staffs have become bigger, politicians are far more adept at marketing, more focused on perceptions and appearances, and unceasing in their attempts to "manage" the media.

At the same time, the lobbying of government by business and myriad interest groups has proliferated. A small industry of "economic consultants" has grown up in Canberra just to produce modelling that purports to prove the rightness of lobbyists' claims.

If keeping governments and power-holders honest is one of the primary responsibilities of the quality press, never have its services been more sorely needed.

A more complex world requires more explanatory journalism from more specialised and qualified journalists. The blizzard of information assailing us requires more trusted guides to what's worth worrying about and what isn't.

A world of more active lobbying by powerful interest groups and more manipulative and secretive governments requires more investigative journalism, not just by dedicated investigation teams but also by more specialised journalists who do more than meekly report the claims of politicians and lobbyists.

This is what I've tried to contribute with my "comment and analysis" in my time at the Herald. It's needed far more today than when I started. I confidently predict the need will only grow.

It's why I hope to see the Herald meet the challenge of digital disruption, making whatever adaptations are needed to ensure it continues to serve readers and contribute to the nation's good governance.

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Why the banks' activities should be constrained

Is there any justification for a royal commission into the conduct of the banks? Is it just a political stunt? All royal commissions are called for political reasons and many are stunts, in the sense that their primary objective is just to bring particular issues into the public spotlight.

To me, the best justification for an inquiry into the banks is that they still don't seem to have got the message. They've been caught treating their customers badly, but so far they've shown little sign of contrition - sorry about the few bad apples, but I didn't know - and little willingness to make amends.

For years they've been locked in a race to maximise profits. They've put profits and executive bonuses ahead of the interests of their customers, and seem keen to resume profit maximising as soon as the fuss declines.

We need to keep the fuss going until the bank bosses realise how unacceptable we find their behaviour. Only then may they accept the need to stop incentivising​ their staff to exploit their customers' vulnerabilities, even at the cost of a little profit.

But if you think we have trouble with our banks, you should get out more. So far, at least, we've been let off lightly. I've just been reading the latest book about the banks' central role in causing the global financial crisis of 2008 and the Great Recession it precipitated.

Almost eight years later, the recovery has been anaemic and looks like staying that way for years yet. If China's slowdown becomes a "hard landing", it's likely to be because the financial crisis has finally caught up with it, too.

The book is Between Debt and the Devil, by Lord Adair Turner, who took over as chairman of Britain's Financial Services Authority just as the crisis struck.

Among the many reservations that may be expressed about the "financialisation" of the developed economies - the huge expansion in the share of the economy accounted for by the banks and other providers of financial services over the past 30 years - Turner is particularly critical of all the credit creation - lending - the banks have done.

For decades before the crisis, in every developed economy, bank lending grew at two or three times the rate at which the economy grew.

Central bankers and other economists came to believe this was normal and natural; how you achieved a growing economy.

In reality, it just meant that when the mountain of credit finally collapsed, plunging the world into its worst recession since the 1930s, many households and businesses were left deep in debt.

According to Turner, it's this "debt overhang" that's doing most to stop the major economies returning to healthy growth. As part of the initial response to the crisis, governments shifted much of the banks' own debt onto the government's books.

This did nothing to diminish the overall amount of debt, just made governments reluctant to increase their spending to support the economy.

But it's the continuing debts of businesses and households that do most to explain the continuing sluggishness of the major economies. When your debt far exceeds the value of your assets, you cut your spending to the bone so as to use as much of your income as possible to pay down that debt.

Trouble is, when so many others are doing the same, their spending cuts cause your income to fall, leaving you with little to use to repay debt. The economy can't really recover and, collectively, it makes little progress in "deleveraging" - getting its debt below the value of its assets.

This is the bind the North Atlantic economies find themselves in.

Turner says the huge growth in bank-created credit has been particularly pernicious because the banks much prefer to lend for purchases of real estate. They do little lending to big businesses investing in expansion, and much of their lending to small business is secured against the owner's home or other property.

Trouble is, with the banks infinitely willing to lend for housing, but with the supply of land in desirable locations strictly limited, the inevitable result is to bid up house prices.

This explains why - though local economists staunchly reject the thought - when foreign economists look at our stratospheric house prices and record rate of household debt, almost to a person they see an asset-price bubble that must one day burst.

Turner devotes much of his book to proposing radical ways the major economies can extract themselves from their unshakable debt overhang and return to healthy growth, and to proposing ways governments can curb their banks' unending credit creation so as to ensure it's a long time before their excessive lending for real estate brings on the next global financial crisis.

But ever-increasing lending is the main way the banks make their ever-increasing profits. They would put up an enormous fight to stop governments clipping their wings in this way.

Which brings us back to the royal commission. Do we want to be governed by politicians deferring to their generous backers in banking, or do we want to send politicians and bankers alike a message that the interests of customers and the wider economy must come first?

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WHAT DOES THE FUTURE HOLD FOR THE ECONOMY?

Talk to Athenaeum Club, Melbourne, Wednesday, April 20, 2016

Today I want to ask: what does the future hold for the economy? The honest answer to such a question is - no one knows, certainly not me. But I doubt if you find such an answer very satisfying, so I’m happy to give you some opinions. They’re highly likely to be wrong since, as Donald Rumsfeld reminded us, our predictions are likely to be confounded by “unknown unknowns”. By definition, I can’t tell you anything about the unknown unknowns, so I’ll limit myself to known knows and known unknowns.

So, what does the future hold? As you may have gathered from my writings, I’m a congenital optimist - though I fear that, by the time I’m through, you’ll find that hard to believe. Another thing you may find hard to believe is that I’m a reasonably conservative person, in that my default position is to expect that things will continue much as they have been. Recessions will be followed by recoveries; the resources boom will be followed by a return to more normal sources and rates of growth.

But of late I’ve begun to fear that Australia - and the world - are in for a further extended period of weak economic growth. Our longer-term rate of growth in GDP has been about 3.5 per cent a year, but I fear we’ll stay closer to 2.5 per cent.

I’m not a person who believes that, whatever is happening in the rest of the world will be pretty much what happens in Oz. We’re part of the world and are influenced by it, of course, but, equally, the domestic influences on our growth are more significant than many people imagine. Even so, there’s widespread agreement overseas that the outlook for the world economy over the coming decade or so is far from bright.

It’s become almost a ritual for the International Monetary Fund to continuously revise down its forecasts for growth in the world economy. It did the same again last week, but this time the accompanying commentary from the fund’s economists was unusually downbeat. Whereas, in the five years before the global financial crisis, growth in the world economy averaged just over 5 per cent a year, it grew by little more than 3 per cent last year and is expected to grow at the same rate this year.

Many economists see that weak growth persisting for years to come. Why so much pessimism? Any number of reasons. One of particular relevance to us is the relatively high risk that China’s slowdown turns out to be a “hard landing”. But I’ve just been reading the challenging new book by the former chairman of Britain’s Financial Services Authority, Adair Turner, Between Debt and the Devil, which attributes the North Atlantic economies’ anaemic recovery from the Great Recession to the deadening effect of the overhang of debt - private more than public - following the many decades before the crisis in which bank credit creation grew at two or three times the rate that the economy grew.

To that you can add all the complications and inhibitions arising from the ill-fated decision to establish the euro single-currency area.

But if that’s not enough for you we have the American productivity expert Robert Gordon’s prediction that we’re in for a sustained period of weaker growth because, contrary to conventional wisdom, the digital revolution isn’t sufficiently revolutionary to provide the sustained productivity growth we enjoyed from earlier innovations, such as electricity or the motor car. Then there’s the leading American economist and former US Treasury secretary, Larry Summers, with his fear of “secular stagnation” - a sustained period of chronically weak demand, caused by the combination of increased desired saving and reduced desired investment. For good measure there are the reputable economists fearing that the digital revolution is about to displace skilled services-sector jobs at rate far faster than those workers can be reabsorbed in other parts of the economy, leading to mass unemployment.

But that’s enough about death and destruction in the international economy. Let’s turn to factors that suggest weaker growth in the domestic economy. One reason growth is likely to continue below average is that we’re likely to see lower immigration and thus slower population growth, down from a peak of 2 per cent a year in the years of the resources boom, to 1.4 per cent or so more recently. It’s easy to imagine that immigration is “exogenous” as economists say - a lever that can be moved higher or lower by the government - but, as Professor Peter McDonald, our leading demographer, has pointed out, it’s actually largely “endogenous”: it’s set within the system by the economic conditions at the time.

The rise of China as a global powerhouse of manufacturing has long had, and will continue to have, a dampening effect on Australia’s manufacturing. Steel production in Whyalla is the latest example. Competition from Asian manufacturers - and local manufacturers’ very real threats to move their factories overseas - are part of the explanation for a significant structural decline in workers’ bargaining power over recent decades. The present exceptionally low rate of wages growth is a two-edged sword when it comes to economic growth: on one hand, the price of labour being relatively low should encourage growth in employment, particularly in labour-intensive service industries. On the other, low wage growth isn’t doing a lot to bolster household income and consumer spending. Savings ratio.

This next point is less true in Oz than it is in America, but economists are becoming more conscious that rapidly widening income inequality - with incomes near the top growing strongly, while incomes around the middle and lower experience little or no real growth for decades - is working to inhibit the growth in consumer spending, simply because high-income households save rather than spend a much higher proportion of their incomes.

 Another factor underlying my fear that we face a future of below-par growth is the knowledge that our record 24-year upswing since the last serious recession in the early 1990s can’t continue forever. Frankly, we’re long overdue for another recession. I don’t know what factor will precipitate that recession - perhaps a sharper than expected fall in Sydney and Melbourne house and apartment prices - but I do know that a year of “negative growth” sometime in the next five would leave average growth for the period looking pretty sick.

One key cause of weakness in the period since the financial crisis is the lack of growth in investment spending in the non-mining economy. There doesn’t seem much sign of this changing any time soon. Some have sought to explain this in terms of business’s lack of confidence thanks to uninspiring political leadership - first under Labor but now, more surprisingly, under the two brands of Liberal leadership. There may be something in this explanation, but I think it can be pushed too far. A rival explanation is that businesses have simply failed to lower their “hurdle rates” of return for new projects to take account of the much lower cost of capital - interest rates - we now face. But I think it’s easier to explain much of the lack of business investment spending more simply: businesses haven’t been investing because they haven’t been seeing many profitable opportunities.

This bring us at last to the econocrats’ long standing argument that what we need to increase the rate of productivity improvement and achieve stronger growth is a new round of economic reform. The business lobbies have taken up this cry with gusto, nominating cuts in rates of personal income tax and company tax, and reforms to industrial relations as top priority. It now seems clear, however, that not even Malcolm Turnbull is prepared to pursue such reforms. Which probably means many of you share my suspicion that growth will remain inadequate in coming years.

I must caution you, however, against the error of believing your own bulldust. It’s not hard to believe lower taxes and a stronger hand for employers would do wonders for the economy when such “reforms” would leave you yourself better off, even if they ended up doing little to benefit the wider economy.

I believe it’s been convenient for the advocates of these reforms to imagine the economic benefits to be greater than they’re likely to be if Treasury and other modelling is to be believed. After all, when Turnbull decided that the huge compensation bill had rendered the plan of using an increase in the GST to pay for income tax cuts too politically costly, he had no trouble demonstrating that the efficiency cost of increasing indirect tax offset almost all the efficiency benefit from cutting income tax. Although I have little faith in the results of economic modelling, I note the finding by Dr Janine Dixon of Victoria University that a cut in the rate of company tax would, after 15 years, cause GDP to be just 0.15 percentage points higher than otherwise.

I believe that a less self-interested search for the most high-potential areas of economic reform would lead us away from tax and wage-fixing towards reform of health, education and infrastructure, particularly big city transportation. But when I say reform I don’t just mean spending more money.

I can understand that many business people will be feeling quite disillusioned at the way Malcolm has shied away from reform in recent days. There must be a great temptation for business people to revert to their earlier diagnosis of the problem: in contrast to earlier times, we simply lack any politicians with the vision and courage - the leadership - to take the risks needed to solve our economic problems. But I’m here to warn you against such a self-serving analysis: the only problem is caused by our politicians’ lack of moral fibre.

You might find this hard to accept, but in all our privatisation, deregulation, globalisation and other reforms over the past 30 years and more, we’ve had a situation where governments in all the developed countries have reshaped their economies in the direction of strengthening markets and making like easier for business. Partly as a result of this process, we’ve seen a widening of the gap between high and low incomes.

In more recent times we’ve also see the rise of unceasing lobbying of governments, particularly by business interests. I think what we’re seeing now is not so much “reform fatigue” or a sudden loss of courage on the part of our political class, but a standoff between business interests on the one side and ordinary voters on the other. It’s the revolt of the punters, with our politicians caught in the middle. Too many voters have compared how well business people seem to be doing with how well they are doing and decided something is badly wrong. They don’t really know what it is that’s going wrong, but they’ve had enough and they’re not going to take it anymore. You can see this in the puzzling rise of Donald Trump and Bernie Sanders in the US, and you can see the same thing going on here in a less dramatic way.

A classic example of this standoff comes with business’s confident expectation that governments will proceed with plans to cut the rate of company tax at the same time as the parliamentary hearings and now the Panama Papers are reminding voters of how successful so many businesses have been in reducing the tax they pay.

I doubt that economic reform will be an answer to the era of below-average growth we face because the era of governments regularly adjusting the regulation of the economy to please business has also come to an end.

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