The beginning of economic wisdom is to understand that the advanced economies – including ours – have stopped working the way they used to and won’t be returning to the old normal.
Second in the getting of wisdom is to understand that economists are still debating why the economy is behaving so differently – so poorly - and what we can do about it.
Last week Reserve Bank governor Dr Philip Lowe gave a speech to a conference of central bankers in Wyoming revealing his acceptance that, as he put it, the economic managers are having to “navigate when the stars are shifting”.
And Treasurer Josh Frydenberg gave a speech on Australia’s productivity challenge, which offered the Morrison government’s first acknowledgement that maybe not everything in Australia’s economic garden is rosy.
The shifting “stars” to which Lowe alluded were economists' estimates of the rate of full employment and the equilibrium real interest rate – both of which have moved downwards. He said that economists have become very good at developing explanations for why this has happened.
“Even so, the reality is that our understanding is still far from complete about what constitutes full employment in our economies and how the equilibrium interest rate is going to move in the future,” he said.
He offered two likely explanations for why the stars had moved. First, major changes around the world in the appetite to save and to invest. People were saving more despite low interest rates, and were borrowing less to fund physical investment despite low interest rates.
On the saving side, these changes were linked to demographics (the ageing population), the rise of Asia (which saves a lot) and the legacy of too much borrowing in the past.
On the investment side, the links were to slower productivity improvement and “importantly, increased uncertainty and a lack of confidence about the future”.
The second major change was an increased perception of competition as a result of globalisation and advances in technology. “More competition means less pricing power, for both firms and workers,” he said.
In all this he gave the lie to the latest line that our economy is going fine, it’s just the threat from abroad that’s the problem. Nonsense. Our economy is slowing to a crawl because of weak real wage growth. The external threat just makes it worse.
After giving a learned account of our slower rate of productivity improvement (and acknowledging that it’s happening throughout the developed world), Frydenberg admitted that business investment spending was not as strong as it ought to be.
But then he stepped into the lions’ den. Rather than returning capital to shareholders, business needed to back itself – make its own luck – by using its strong balance sheet (and exceptionally low interest rates) to “invest and grow”.
The fury of the righteous descended upon him, with the business media in full cry. It really is amazing the way business people boast about the centrality of the private sector to the economy and its success, but refuse to accept any responsibility for its outcomes.
Any weaknesses in the economy are solely the government’s fault, and feel free to criticise it uphill and down dale – not to mention using problems in the economy as a pretext for rent-seeking. Don’t even think that the performance of business could be less than blameless. Who do you think invented the term “all care but not responsibility”?
Even so, I fear business is right in protesting that the reason it’s not investing is that, with demand so weak, it can’t see how expanding its production capacity could be profitable.
This problem began long before Trump started playing his crazy trade-war games, but there’s little doubt that the uncertainty he has created is adding to firms’ reluctance to commit to major investment projects. And the more people delay their investment plans until the future is clearer, the greater the risk that conditions deteriorate and the investment never gets done.
Dr Mike Keating, a former top econocrat, argues that productivity improvement is weak because business investment spending is weak. It’s when businesses install the latest and best machines and systems that new technology is diffused through the economy, lifting productivity.
So when weak wage growth leads to weak growth in consumption, you don’t get enough business investment and, hence, slower productivity improvement.
Government intervention to improve workers’ bargaining power may help speed up the flow of income through the system, but Keating believes a lasting improvement will come mainly by making education and training more effective in helping workers adapt to and adopt new technologies.
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Second in the getting of wisdom is to understand that economists are still debating why the economy is behaving so differently – so poorly - and what we can do about it.
Last week Reserve Bank governor Dr Philip Lowe gave a speech to a conference of central bankers in Wyoming revealing his acceptance that, as he put it, the economic managers are having to “navigate when the stars are shifting”.
And Treasurer Josh Frydenberg gave a speech on Australia’s productivity challenge, which offered the Morrison government’s first acknowledgement that maybe not everything in Australia’s economic garden is rosy.
The shifting “stars” to which Lowe alluded were economists' estimates of the rate of full employment and the equilibrium real interest rate – both of which have moved downwards. He said that economists have become very good at developing explanations for why this has happened.
“Even so, the reality is that our understanding is still far from complete about what constitutes full employment in our economies and how the equilibrium interest rate is going to move in the future,” he said.
He offered two likely explanations for why the stars had moved. First, major changes around the world in the appetite to save and to invest. People were saving more despite low interest rates, and were borrowing less to fund physical investment despite low interest rates.
On the saving side, these changes were linked to demographics (the ageing population), the rise of Asia (which saves a lot) and the legacy of too much borrowing in the past.
On the investment side, the links were to slower productivity improvement and “importantly, increased uncertainty and a lack of confidence about the future”.
The second major change was an increased perception of competition as a result of globalisation and advances in technology. “More competition means less pricing power, for both firms and workers,” he said.
In all this he gave the lie to the latest line that our economy is going fine, it’s just the threat from abroad that’s the problem. Nonsense. Our economy is slowing to a crawl because of weak real wage growth. The external threat just makes it worse.
After giving a learned account of our slower rate of productivity improvement (and acknowledging that it’s happening throughout the developed world), Frydenberg admitted that business investment spending was not as strong as it ought to be.
But then he stepped into the lions’ den. Rather than returning capital to shareholders, business needed to back itself – make its own luck – by using its strong balance sheet (and exceptionally low interest rates) to “invest and grow”.
The fury of the righteous descended upon him, with the business media in full cry. It really is amazing the way business people boast about the centrality of the private sector to the economy and its success, but refuse to accept any responsibility for its outcomes.
Any weaknesses in the economy are solely the government’s fault, and feel free to criticise it uphill and down dale – not to mention using problems in the economy as a pretext for rent-seeking. Don’t even think that the performance of business could be less than blameless. Who do you think invented the term “all care but not responsibility”?
Even so, I fear business is right in protesting that the reason it’s not investing is that, with demand so weak, it can’t see how expanding its production capacity could be profitable.
This problem began long before Trump started playing his crazy trade-war games, but there’s little doubt that the uncertainty he has created is adding to firms’ reluctance to commit to major investment projects. And the more people delay their investment plans until the future is clearer, the greater the risk that conditions deteriorate and the investment never gets done.
Dr Mike Keating, a former top econocrat, argues that productivity improvement is weak because business investment spending is weak. It’s when businesses install the latest and best machines and systems that new technology is diffused through the economy, lifting productivity.
So when weak wage growth leads to weak growth in consumption, you don’t get enough business investment and, hence, slower productivity improvement.
Government intervention to improve workers’ bargaining power may help speed up the flow of income through the system, but Keating believes a lasting improvement will come mainly by making education and training more effective in helping workers adapt to and adopt new technologies.
