Wellbeing? Measure what matters, then start fixing it

In this rushing world, it’s easy for the new, the exciting, the entertaining or the worrying to crowd out the merely important. But that’s one reason mastheads have columnists. To say, hey, don’t overlook this, it’s important.

If, like all sensible people, you think there’s more to life than gross domestic product – more than “the economy”, narrowly defined – you need to take more notice of Treasurer Jim Chalmers’ long-promised Measuring What Matters wellbeing framework, released on Friday.

Taken as just another news story, it was a remarkably unremarkable document. It gathered 50 statistical indicators of Australians’ wellbeing, only a few of which were the standard economic indicators.

Of these, 20 show an improvement since the early 2000s, 12 have deteriorated, while the rest have shown little change or mixed outcomes. Our headline shouted the astonishing news: “We’re living longer, but cuddly animals are on the decline.”

Meanwhile, the government’s unceasing critics had much sneering fun pointing out how outdated some figures were. Did you see they say home owners are finding it easier to repay their mortgages?

Hopeless. It’s obviously just Labor’s “pitch to progressives living in Green and teal colonies”.

Actually, it’s a genuine effort to acknowledge and pay more attention to all the aspects of our lives that matter in addition to how many of us have jobs, how much we earn and what we’re spending it on.

The people who know a lot and care a lot about our wellbeing, in all its dimensions – such as Warwick Smith, director of the Centre for Policy Development’s Wellbeing Initiative – were much less critical. They said it was a good start, and could be improved and built upon, with the ultimate objective of having our greater consciousness of these other priority areas doing more to influence what the government was spending its time trying to improve.

Few economists would disagree with the frequent claim that GDP isn’t a good measure of wellbeing or progress. Indeed, the first person to say it was the bloke who invented GDP in the 1930s, Simon Kuznets.

It’s just that, economists being economists, they’ve continued to focus on GDP – economic growth – and left the better measures of wellbeing to others. Politicians have continued to focus on economic growth because that’s what the rich and powerful care most about. They’re hoping it will make them richer and more powerful.

It’s precisely because our leaders have been so focused on GDP as a measure of economic growth that our economic statistics are comprehensive and up to date, but our measurements of other things aren’t.

So, getting fair dinkum about “measuring what matters” involves giving the Australian Bureau of Statistics more money to measure the other things that matter more fully and more frequently.

Having been a bean counter in both my careers, I know the boring, pettifogging importance of measurement. As they say, what gets measured gets managed. You want to get your map sorted before you take off into the jungle.

But what are the other, non-standard things that matter most to our wellbeing? This is what we got on Friday: the government’s decision about the key components of wellbeing. This is the wellbeing “framework”.

It nominates five dimensions of wellbeing. First, health. “A society in which people feel well and are in good physical and mental health, can access services when they need, and have the information they require to take action to improve their health,” the framework says.

Second, security. “A society where people live peacefully, feel safe, have financial security and access to housing.”

Third, sustainability. “A society that sustainably uses natural and financial resources, protects and repairs the environment and builds resilience to combat challenges.”

Fourth, cohesion. “A society that supports connections with family, friends and the community, values diversity, promotes belonging and culture.”

And finally, prosperity. “A society that has a dynamic, strong economy, invests in people’s skills and education, and provides broad opportunities for employment and well-paid, secure jobs.”

Each of these five “themes” (dimensions is a better word) are “underpinned” by the need for “inclusion, equity and fairness” (but if there’s a difference between equity and fairness, I don’t know it).

I think that covers the bases. Sounds a nice place to live. It puts the economy into a broader, more balanced context. The economy is vitally important – it’s our bread and butter, after all – but so are many other things.

If we nail it on prosperity but go backward on the others, why would that be good? The rich could survey the ruins around them and say, I won!

And there’s a lot of interdependence. Good luck with your economy once you’ve irreparably damaged the natural environment on which it depends.

On many of these dimensions, what we need to know is not so much how well we’re doing on average, but who’s missing out and needs help. Not who’s included, but who’s excluded. (Something a Voice would make it harder to forget.)

But measurement is just a means to an end. Until what we know affects what our governments do, it’s just box-ticking.

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How to damage Australia: don’t collect good data

You don’t have to be very bright to see that as we enter the information age, realise decisions need to be evidence-based, and glimpse the huge potential of “big data”, we need the Australian Bureau of Statistics to be at the top of its game. But you do have to be brighter than our econocrats and politicians.

They’ve been cutting the bureau’s funding every year for more than a decade – meaning both parties have been at it – in the name of increased efficiency. The Orwellian annual “efficiency dividend”, cutting up to 2.5 per cent off running expenses, is a flowing fount of false economy.

According to the bureau’s boss, David Kalisch, it has suffered a reduction in real resources of more than 20 per cent over the past decade. Meanwhile, funding from big users of its data – which now accounts for between 10 and 20 per cent of its total funding - has increased only slightly.

The majority of its social statistical collections are only possible through user funding, with budget funding devoted predominantly to its economic and population stats.

The cutbacks have obliged the bureau to “prioritise”. It has reduced or stopped a number of statistical collections, with Kalisch admitting it hasn’t undertaken a survey of the way Australians use their time, nor a survey of mental health, for more than a decade.

“If the [bureau] continues to be subject to efficiency dividends over the next decade, at the same trajectory as it has for the past decade, some of the core information currently taken for granted by governments, business and the community may no longer be available,” he told a conference last month.

“Our capacity to continue producing all of the detailed statistics around our labour market, industry activity and population would increasingly be at risk.”

It oughtn’t be necessary to remind politicians, bureaucrats, marketers, academics, journalists and ordinary citizens just how heavily we rely on our national statistical office for reliable, objective information about a hundred dimensions of what’s actually happening around us, including to the natural environment.

The bureau’s data inform “fiscal and monetary policy settings, social support programs and infrastructure spending . . . many pertinent public policy debates, such as housing affordability, income and wealth inequality, cost of living, energy prices, the quality of life in our cities and regions, education and health outcomes, needs-based school funding, immigration policy and much more,” Kalisch told a conference of economists.

That’s not to mention that official data are “key to the effective functioning of our democracy, with population data helping establish fair electoral boundaries and our official statistics informing choices by voters and political aspirants”.

But it’s not just that we’d be much more poorly informed if government spending cuts robbed us of any of the information we presently collect. Our economy, society and natural environment keep changing, meaning we need to measure more than we do at present, as well as improving the way we measure things because they’ve changed from what they were.

Kalisch says globalisation and the digital economy introduce new measurement challenges. Over the past 15 years, the services sector has grown at an average rate of 6 per cent a year, meaning it now accounts for 63 per cent of gross domestic product [and a much higher proportion of total employment].

Measuring services is more difficult – conceptually and empirically – than goods. Good measurement of two key industries – health and education – is particularly important.

“Policy-makers and service providers are confronting wicked [difficult or impossible] problems across social policy and the environment that require a more sophisticated evidence base,” he says.

The bureau was an early public sector adopter in using computers, but in 2013 Kalisch’s predecessor blew the whistle on its “fragile ageing statistical infrastructure”. In 2015 the government agreed to provide most of the additional funding to build new systems.

In 2016 the bureau struck trouble with its first go at having many people complete their Census forms online. At the start of the filing period, the system was offline for nearly two days.

It was a “teachable moment”, but the bureau “owned the process errors, has reflected upon the learnings from this experience" and has revised its operating arrangements across the bureau. As proof it has learnt its lesson, Kalisch points to its trouble-free conduct of the same-sex marriage postal survey.

And all this before we get to big data. Any fool can see its huge potential for improving our evidence base at relatively low cost. But it takes a bit more brain to see that if we barge on with little attention to the public’s concerns over privacy and Big Brother governance, we could derail the whole show before we even get going.

Just the right time to cut the funding of the national statistical agency and decide we can afford to do stats on the cheap.

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Economic growth doesn't have to wreck environment

Do you care about the natural environment and the damage our economic activity is doing to it? What if an official agency published some good news on the subject? Would you be interested? Would you be pleased?

Apparently not. Two weeks ago the Australian Bureau of Statistics published its “Australian environmental-economic accounts” for 2015-16, which contained what certainly looks like good news, but they attracted minimal interest from the media and environmental groups.

Perhaps had the news been bad there’d have been more interest. Instead, the bureau found that, in 2015-16, the Australian population grew by 2 per cent and the economy – measured by the quantity of goods and services produced during the year – grew by 3 per cent.

But our emissions of greenhouse gases grew by just under 1 per cent, while our consumption of energy increased by less than 1 per cent and our consumption of water actually fell by 7 per cent.

Get it? We increased our output of goods and services – the amount of our economic activity – but increased our inputs of some key natural resources by less. Our generation of a particularly pernicious form of waste, greenhouse gas emissions, also increased by less.

In other words, we improved the economy’s ecological productivity. Is that not worth noting?

Actually, those figures need to be examined a lot more closely before we pop too many champagne corks. But first, we need to remember why, whether the news they bring is good or bad, it’s worth taking a lot more interest in the annual “national environmental-economic accounts” than we have been.

Which raises a less conspiratorial explanation for our lack of interest in the environmental-economic accounts: because, as associate professor Michael Vardon, of the Australian National University, has pointed out, they’re still a work in progress, with not many people knowing of their existence and even fewer knowing how to extract from their raw numbers the message they’re sending about how much progress we’ve made on the path to ecological sustainability.

That the economy exists within the natural environment, and depends on it for the renewable and non-renewable natural resources we put into our production process, for the “ecosystem services” that grow our food, among many other things, and even for somewhere to dump all the material and airborne waste we generate, is undeniable.

Yet from the moment people started thinking about “the economy”, they viewed it in isolation from the natural environment that sustains it.

A hundred years ago, this seemed sensible. The world’s human population was a fraction of what it is today and we were much poorer than we are now, so it seemed human activity was having only a small impact on the huge natural world.

We knew little about soil erosion and salinity, the wider effects of fertilisers, damming rivers and overfishing, let alone that too much burning of fossil fuels and land clearing could change the climate.

Our economic national accounts and their bottom line, gross domestic product, rest on the happy assumption that we can measure the economy without reference to the natural environment that sustains it.

As greenies never tire of pointing out, GDP takes little or no account of the environmental costs that come with the economic benefits. It even counts spending to remedy environmental damage as another benefit.

Little wonder so many people have been looking for ways to bring the two sides into reconciliation, getting them into the same box, putting their measurement on a comparable basis, so economic benefits can be weighed against environmental costs.

Under the auspices of the United Nations Statistical Commission, the world’s official statisticians have been working to expand the long-accepted rules for measuring GDP, the “system of national accounts”, into a “system of environmental-economic accounting”, or SEEA.

Our bureau of statistics has been active in this project and in 2012 the official SEEA “central framework” was published by the UN. The bureau has been working on the huge task of carrying out and integrating all the physical and monetary measurements needed to put flesh on that framework for Australia.

Progress has been slow, especially because the government’s extraction of annual alleged “efficiency dividends” from the bureau's budget has reduced the work it can do.

But now let’s examine the news that we increased our ecological productivity in 2015-16, presumably leaving us better off both economically and environmentally.

First, this is a caution for all those environmentalists who keep repeating that, in a natural world of fixed size, it’s impossible for the economy to keep growing every year forever.

They’re right, of course, but the economic growth they’re thinking of – growth in the throughput of natural resources – isn’t the growth that GDP measures. Much GDP growth comes not from increased physical throughput in the economic machine, but from increased efficiency in the machine’s conversion of inputs (the greatest of which is not natural resources, but human labour) into outputs of goods and services, aka improved productivity.

So it is conceptually possible for GDP to grow while the use of natural resources doesn’t, or even declines. If that happens, it’s good news all round.

Second, these relationships are far too complex for it to make sense to look just at the change over a period as short as a year. The accounts show that, over the nine years to 2015-16, our population grew by 16 per cent and real GDP by 28 per cent, while energy consumption increased by only 6 per cent and water consumption decreased by 2 per cent.

Emissions of greenhouse gases decreased by 13 per cent relative to 2006-07. But generation of material waste seemed to be growing at about the same rate as GDP. Not good.

Finally, we need to know a lot more about the factors driving these changes, and whether they’re lasting or temporary, before we can conclude we’re making ecological progress.

And remember we need our consumption of fossil fuel energy to be falling rapidly if we’re to make the contribution we should to global efforts to halt global warming.

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What motivates decent bankers to rip off their customers

Amid all the reluctant truth-telling at the banking royal commission, one big lie has yet to be apprehended: shame-faced witnesses keep admitting they put their shareholders’ interests ahead of their customers’. Don’t believe it.

From the chief executives and company directors to those middling managers who seem to be the main ones being sent into the firing line, it’s not the shareholders’ pockets they’ve been so keen to line, it’s their own.

They’ve been jumping whatever hurdles they’ve had to clear to get the bonuses they were promised. Why would you rip off old people’s life savings for any lesser reason?

It’s a safe bet that everyone from the very top to well down has been “incentivised” with performance targets and bonuses. I reckon only the lowly would be lumbered with key performance indicators unattached to extra moolah.

It’s hard to imagine how so many seemingly ordinary, decent Australians were led to do so many unethical, dishonest, even illegal things for so many years without them convincing themselves it was normal bankerly behaviour – “everyone’s doing it; I don’t want to miss out” – and that by achieving the targets their bosses had set them, they were being diligent and loyal employees, worthy of reward.

But though the financial services industry must surely be the most egregious instance of the misuse of performance indicators and performance pay, let’s not forget “metrics” is one of the great curses of modern times.

It’s about computers, of course. They’ve made it much easier and cheaper to measure, record and look up the various dimensions of a big organisation’s performance, as well as generating far more measurable data about many aspects of that performance.

Which gave someone the bright idea that all this measurement could be used as an easy and simple way to manage big organisations and motivate people to improve their performance.

Setting people targets for particular aspects of their performance does that. And attaching the achievement of those targets to monetary rewards hyper-charges them.

Hence all the slogans about “what gets measured gets done” and “anything that can be measured can be improved”.

Thus have metrics been used to attempt to improve the performance of almost all the major institutions in our lives: not just big businesses, but primary, secondary and higher education, medicine and hospitals, policing, the public service – the Tax Office and Centrelink, for instance.

Trouble is, whenever we discover new and exciting ways of minimising mental effort, we run a great risk that, while we’re giving our brains a breather, the show will run off the rails in some unexpected way.

It took a while for someone to come up with the slogan antidote: “Not everything that can be counted counts, and not everything that counts can be counted”. Not everything that’s important is measurable, and much that is measurable is unimportant.

Trust, which the bankers had a lot of, is hugely valuable but hard to measure. They failed to notice the way their sharp practice – their attempt to “monetise” that trust – was eroding it.

And now they are reaping a whirlwind no KPI warned them was coming. If you work in financial services, don’t try measuring “esteem” or “reputation” any time soon.

I’ve long harboured doubts about the metric mania, but it’s all laid out in a new book, The Tyranny of Metrics, by Jerry Muller, a history professor at the Catholic University of America, in Washington DC.

Muller says we’ve been gripped by “metric fixation” which is “the seemingly irresistible pressure to measure performance, to publicise it, and to reward it, often in the face of evidence that this just doesn’t work very well”.

The glaring weakness of metrics and KPIs is how easily they can be fudged. Since most jobs are multifaceted, and you can’t slap a KPI on every facet, the simplest and least dishonest way to fudge is concentrate on those aspects of the job covered by a KPI, at the expense of those that aren’t.

Everyone from the chief executive to the lowliest clerk understands this. So why does the practice persist? Because bosses are just as busy fudging their targets as their underlings are. So long as your fudging helps your boss with their fudge, what’s the problem?

Schools fudge their performance on standardised tests by “teaching to the test” or even inviting poor performers to stay home on test day. Police services improve their serious crime clear-up rates by classing more crimes as less serious, or failing to record every crime reported to them.

Hospitals improve their performance by declining to admit people with complicated problems; surgeons improve their performance rates by refusing to treat tricky cases. Sometimes this means patients with big problems suffer delays in treatment, and maybe die. But this doesn’t show in the indicator.

Muller notes the obsession with measurement can get everyone focused on unimportant things that seem easy to measure and away from important things that can’t be measured. It can divert resources away from frontline producers towards managers, administrators and data handlers.

Worse, using money to motivate people tends to crowd out intrinsic motivation: taking a pride in doing your job well and giving customers or taxpayers value for money. It can distort an organisation’s goals and stifle creativity.

Measurement’s fine, so long as it’s used as an aid to human judgment, not a substitute for it.

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We're on the way to peak everything

Some economists worry the world economy isn't growing fast enough. It's slowing down and reaching the point of "secular stagnation".

On a very different wavelength, however, environmentalists worry that if the world economy keeps growing the way it is, it won't be long before we run out of the natural resources on which that growth depends. Whoops.

But if all that's a bit heavy for the holiday season, here's something lighter. Remember all that crazy talk a few years back about the paperless office? What a joke.

Then there was peak oil. Whatever happened to that looming disaster?

If any of those possibilities piques your interest, I have news - courtesy of an essay by Professor John Quiggin, of the University of Queensland.

Quiggin thinks the paperless office is on the way, especially because the world has already reached "peak paper".

Despite continuing economic growth, peak paper was reached in 2013. "Global paper production and consumption reached its maximum, flattened out, and is now falling," he says.

Until relatively recently, the growth and spread of information was directly linked to the growth in paper, books and newspapers.

The closely related information revolution and digital revolution have broken that link. Businesses and governments don't print reports, they just put them on their website. We read e-books and online newspapers.

Banks and businesses want to stop sending us statements and bills through the post. If we hold out too long, they impose a fee for continued paper statements.

As for peak oil, Quiggin says that, in terms of oil consumption per person, the world reached it in 1979.

"In the developed countries, the decline in oil consumption per person has outpaced population growth, with the result that total consumption is declining. The average person in a developed country now uses less oil than her parents did 40 years ago," he says.

Why has this remarkable change attracted so little notice? Partly because much of the reduction in energy use has taken the virtually invisible form of improvements in energy efficiency. Both industrial processes and household appliances use far less energy than they used to.

But also because, until fairly recently, the main substitutes for oil have been other fossil fuels, such as coal and gas. Only in the past 10 years have renewable energy sources, especially wind and solar, begun to play a significant role, he says.

Peak coal has already arrived in the developed world. Coal consumption has fallen substantially in the US and Europe, and is set to fall further.

Until recently, the decline in fossil-fuel use in the developed world has been more than offset by rapid growth in the developing countries.

But even China - the planet's largest coal consumer by far - has changed course. Beginning with Beijing, it has begun closing down all the coal-fired power stations near major cities.

"In fact, China reached peak coal in 2013, at the same time as it reached peak paper," Quiggin says.

As for peak steel, it's different. Steel lasts a long time and can be recycled almost endlessly, but demand for it is finite.

In developed countries, the stock of steel reached about eight tonnes a person decades ago, he says, and has remained stable or slowly declining since then.

"With the stock of steel on a gently sloping plateau, the need for more can be met almost entirely by recycling scrap, rather than by burning coal to smelt iron ore in blast furnaces.

"The result has been described as a 'circular economy'. When this arrives, peak steel will have been reached."

All this has happened while economic growth has continued and living standards have risen.

Economists have been saying for years, particularly in the developed world, that growth is becoming "weightless". The part of the economy that's growing isn't goods - things you can drop on your toe - but services: people doing things for people, whether fixing their health, teaching them nuclear physics or waiting on their table.

With an ever greater proportion of gross domestic product - the quantity of goods and services produced in a period - accounted for by services, economic growth becomes ever less dependent on the increased use of natural resources.

Over the long term, growth in real GDP comes less from the use of more raw materials, human labour and man-made machines and structures and more from improved "productivity" - greater efficiency with which those inputs are transformed into outputs of goods and services.

What drives productivity improvement? Advances in technology and accretion of human capital. That is, the growth and spread of knowledge and information.

But an information-driven economy is very different from the one we've become used to since the industrial revolution, one driven by the use of natural resources to produce goods plus a few conventional services.

Natural resources are finite. If you want to use my coal or paper you must pay me (they're "excludable"). Any coal or paper you use can't be used by someone else (they're "rivalrous").

This makes economic growth relatively easy to measure. But knowledge and information are opposite to natural resources: they're often freely available (non-excludable) and my knowing something doesn't stop you knowing it, too (non-rivalrous).

What's the difference between a taxi and Uber? Information. What's the difference between renting a hotel room or self-catering accommodation and Airbnb? Information.

A knowledge and information-driven economy is one whose continuing growth makes less demands on the natural environment than many scientists and environmentalists imagine. That's particularly true as we move to renewable energy.

But a knowledge and information-driven economy is harder to measure, especially using the metrics (GDP) we developed to measure a raw materials and goods-based economy.

We're now in a world where GDP is going one way and raw-materials use is starting to go the other way.

That's why Quiggin doubts that world economic growth is grinding to a halt.

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Economy will look better when mining investment stops falling

Here's a little tip for the start of another working year: if you want to make much sense of the economy, you need a good feel for arithmetic.

Thanks to our obsession with economic growth, we're almost always focusing on the change in economic indicators like gross domestic product and its components, such as consumer spending, business investment, imports and exports. (And the figures we look at are usually "in real terms" – they've had the effect of inflation removed from them.)

So the big focus is on whether indicators have grown or shrunk since last quarter or last year and, if so, by how much. This means I often find myself writing a sentence such as "the growth in X – exports, say – accounted for more than all the growth in GDP".

Almost every time I do I get someone saying "what? how can that be true? How can the growth in a component of the total account for more than all the growth in the total?"

If that objection makes sense to you, you're showing your lack of arithmetic imagination. It's perfectly possible for one component to grow by more than the growth in the total provided some other component shrinks. Oh, of course.

Now consider this: we've been very unhappy with our "below trend" (below average) rate of economic growth in recent years, such as our growth of just 2.5 per cent over the year to September.

But everyone knows our problem is that we're having to make a transition from growth led by mining – in particular, by the massive surge in investment in the construction of new mines and natural gas facilities – to growth led by the rest of the economy.

And rough calculations suggest that the "non-mining economy" grew by about 3 per cent over the year to September.

Since we know the economy overall grew by 2.5 per cent, this means the "mining and mining-related economy" must have contracted over the year. This is hardly surprising: mining investment spending is dropping like a stone.

It's also good news. For a start, it says we've made a lot of progress in getting the rest of the economy growing strongly.

But there's another, arithmetic point. The collapse in mining investment can't go on forever. Eventually you hit bottom and can't fall any further. When that happens, the mining sector stops "subtracting from growth".

And when mining is neither subtracting from growth nor adding to it, the quite-strong growth in the non-mining economy will be all the growth we've got – and it, we can hope, will still be growing by 3 per cent a year.

In other words, the economy should speed up as soon as it loses the drag coming from the big contraction in mining investment. And that should happen by about the end of this year.

Next, have you noticed how popular it's become to measure the budget's performance by looking at the change in the level of government spending as a proportion of "nominal" (that is, before adjusting to remove the effect of inflation) GDP?

In principle, it makes sense to compare nominal government spending with the nominal size of the economy. It's saying that the size of the economy grows for various reasons – inflation, real growth, growth in the population – and it shouldn't worry us that government spending is growing for the same reasons.

It's only noteworthy when government spending is growing faster or slower than the economy.

But here's where it helps to have a feel for arithmetic. When you keep comparing an economic variable to a particular "denominator" (the number that goes on the bottom of the sum) over many years, you're implicitly assuming that the denominator (nominal GDP, in this case) moves in a reasonably steady, reliable way.

If so, any change in the ratio (the percentage) can be attributed to changes in the "numerator" (the number that goes on the top; in this case, government spending). If the denominator isn't moving in a stable fashion, then this instability could be contributing to the change in the percentage, making it hard to be sure what's going on with the numerator.

Trouble is, the resources boom has played havoc with the stability of nominal GDP. Why? Because GDP, being a measure of the nation's production of goods and services, naturally includes our production of exports.

But we know that the prices we were getting for our main mineral exports – coal and iron ore – shot up to unheard of levels in the early part of the boom, then from mid-2011 began falling back to earth.

To see how this has affected the stability of nominal GDP, consider these comparisons (for which I'm indebted to Michael Blythe, chief economist of the Commonwealth Bank). Over the nine years to 2001-02, it grew at an annual average rate of 6.1 per cent. (This would be inflation of 2.5 per cent plus real growth of about 3.5 per cent.)

We can think of that as nominal GDP's "normal" rate of growth. But then the prices boom starts and continues for the nine years to 2010-11, during which it grew at a rapid annual average rate of 7.2 per cent.

In the four years to 2014-15, however, the fallback in export prices caused nominal GDP to grow at a pathetic annual rate of 3.4 per cent – just a bit more than half what's "normal".

Get the point? The ups and downs of our mineral export prices shouldn't have any direct effect on the growth in government spending (though the boost to tax collections may have encouraged governments to be more generous on the spending side).

So the resources boom has had the effect of causing the government spending-to-GDP ratio to understate the extent of the growth in spending during the boom years, but now is overstating it.

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Digital revolution transforms productivity debate

A second former econocrat has joined former secretary of the Prime Minister's department Dr Mike Keating in seeking to lift the tone of the economic debate.

"We are spending too much effort debating how and how quickly we should bring the Commonwealth budget back into balance," Dr Ric Simes said in a speech to the Australian Business Economists this week.

"We need to elevate the economic debate from the level of catchcries about debt and deficits, or about productivity or even about the use of cost-benefit analyses. We need some deeper analyses being brought to the surface."

Simes, now a director of Deloitte Access Economics, formerly of Treasury and economic adviser to Paul Keating as prime minister, wants to see a more sensible discussion about productivity.
Productivity is obviously important and policy should indeed be focused on lifting it.

"But we do need to be careful about what this may mean in a particular circumstance," he said. One problem is that productivity is being used as a catchcry for myriad causes, often unjustifiably.

Simes agreed with Mike Keating's trenchant observation that "business associations, some leading employers and their camp followers in the media are insisting that future reforms must focus on alleged labour market rigidities and reductions in taxation, as if these were the most important influences on productivity".

And while "there is scope for improved labour relations to make a modest contribution to improved productivity ... the main responsibility for improvements in that regard lie with employers themselves," Keating has written.

"The best thing that employers and their trade associations could do is to stop passing the buck to everyone else for their own failings, and get on with making their workplaces more productive using the existing freedoms that they undoubtedly have," Keating concludes.

Simes adds that this is exactly what most businesses try to do. For his evidence, keep reading.

Simes' second problem with how "productivity" is being used in the debate concerns its measurement. "Productivity is simply a less than perfect measure of economic wellbeing, and having the public debate focus so much on what the Bureau of Statistics reports as productivity can be unhelpful."

Indeed, Professor John Quiggin, of the University of Queensland, had called productivity an "unhelpful concept", mainly because of problems with the way the contributions of labour and capital were measured in its calculation.

Simes agreed with Quiggin that we'd be better off using a term that was closely related to productivity, "technological progress" - that is, the introduction of technological innovations such as new products and improved production technologies.

Rhetoric - the choice of terms - did matter, Simes said, and had we been using the term technological progress instead of productivity, the debate wouldn't have been so open to distortion by vested interests.

"Tax, or industrial relations, or fiscal policy, can and should be refined, but they are not at the heart of why measured productivity weakened after 2000," he said.

But the measurement problem went further. "I think we have a fundamental problem in that our measures of gross domestic product or productivity are becoming less reliable proxies for economic welfare."

If instead of looking at productivity statistics we stand back and look at the way societies and businesses are changing, we find some profound changes under way, particularly the digital revolution.

We see consumers forcing retailers and media companies to transform. His own research had found that, without telework, only 14 per cent of new mums said they would return to work with their old employer, but 61 per cent said they would if telework was available.

His research had found how companies' information technology policies on staff use of social media at work and BYOD - bring your own device - were of growing importance in attracting young and talented employees.

He'd found that businesses able to create a "collaborative" working culture - including through use of digital technologies - succeeded in growing faster than otherwise.

What has this to do with productivity? First, most of the change we were seeing was being driven by individuals, whether they be consumers, workers, students or patients. To a trained economist, this should suggest that economic welfare had probably risen - and risen a lot.

It was hard not to conclude that individuals making deliberate decisions to do something new were adding to their own welfare, and to society's.

But, second, if this isn't showing up in our measures of welfare - such as GDP or productivity - then maybe there was something wrong with those measures. It seemed to Simes that "productivity, as measured, misses many, if not most, of the gains to consumer and social welfare that digital technology is delivering".

It didn't capture the benefits from improved convenience when we no longer had to queue for ages to renew a licence or at our bank branch. Nor the convenience of being able to search for a needed service in a fraction of the time it took before the internet.

It didn't capture the benefits of much greater choice. The Amazon books site, for instance, took costs out of the supply chain (thus reducing prices to consumers) but also provided much greater choice of books in a convenient manner.

Studies by Erik Brynjolfsson and others at the Massachusetts Institute of Technology had estimated that the easy access to a greater choice of books generated seven to 10 times the consumer welfare that the more efficient supply chain generated (the only bit that would make it into measured productivity).

He wasn't saying we should include the benefits of convenience and choice in our measurement of GDP - that wouldn't work.

No. "What I am arguing is that we need to be careful to base policy decisions on a deeper understanding of our objectives and not be driven by simplistic rhetoric," he said.

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Mining boom our gift to rich foreigners

The mining tax - whose last-minute reprieve may well prove temporary - is the greatest weakness in the argument that we gained a lot from the resources boom. The blame for this failure should be spread widely, with economists taking a fair share.

Late last week a majority of senators passed the bill repealing the minerals resource rent tax, but not before knocking out its provisions cancelling various programs the tax was supposed to be paying for.

The government is refusing to accept the amended version of the bill, arguing that "by voting to keep many of the associated spending measures [naughty - most are actually tax expenditures], senators have effectively voted to keep the mining tax".

We'll see how long that lasts. But if you're thinking the tax raises so little it hardly matters whether it stays or goes, you're forgetting something. When Labor allowed BHP Billiton's Marius Kloppers and his mates from Rio Tinto and Xstrata (now Glencore) to redesign the tax, they predictably opted to take their depreciation deductions upfront. Once they're used up, however, receipts from the tax will be a lot healthier - provided it survives that long.

You can blame Kevin Rudd, Wayne Swan and Julia Gillard for their hopeless handling of the tax. But don't forget to copy in Tony Abbott who, faced with a choice between the interests of Australian taxpayers and the interests of three foreign mining giants, sided with the latter in the hope they'd fund his 2010 election campaign.

You can also blame Treasury for originally proposing an incomprehensible, textbook-pure version of the tax which couldn't survive, and so getting us lumbered with a fourth-best version. It also did a bad job of quietly test-marketing the tax with its banking contacts and of estimating the likely receipts.

But where were all the economists - including academics - explaining to the public why the tax wouldn't discourage mining activity or otherwise damage the economy, as it suited the big miners to claim?

Where were the economists explaining the special need for a resources rent tax in the case of the exploitation of mineral deposits, particularly when the miners were so largely foreign-owned?

As usual, they were keeping their mouths shut. Contribute their expertise to the public debate? Why? Better just to criticise from the sidelines.

Part of the problem is an ethic among economists that regards it as bad form to distinguish between local and foreign investors for fear of inciting "economic nationalism" - a form of xenophobia. If an investment generates jobs and income, why does it matter whether the firms involved are local or foreign?

It's no doubt thanks to this ethic that we do such a bad job of measuring foreign ownership (and so deny ourselves the ability to use hard facts to fight xenophobic impressions that foreigners now own everything). But the best guess is that mining is about 80 per cent foreign-owned.

Trouble is, mining is an obvious exception to this generally sensible aversion to economic nationalism, for two reasons: because our abundant natural endowment makes minerals and energy such a huge source of economic rent and because mining is so extraordinarily capital-intensive.

Added to that, as Dr Stephen Grenville (a former senior econocrat who does make a useful contribution to the public debate, via the Lowy Institute) has written, "mining royalties, a state government domain, fall victim to special relationships and inter-state competition to attract projects".

Put all that together and you see why having an effective resource rent tax is so essential to ensuring Australians get a fair reward for the exploitation of their birthright. High economic rents, few jobs created and the lion's share of profits going to foreigners mean unless especially high rates of profitability are adequately taxed we don't have a lot to show for the resources boom.

Saying that isn't anti-foreigner, it's simple self-interest, the driving force of market economies. Foreigners are welcome, provided we get a fair share of the benefits. Foreign investment isn't meant to be a form of aid to rich foreigners.

It's true our rate of national saving increased during the boom. But a lot of this was foreign-owned mining firms reinvesting their profits in local expansion rather than repatriating them, thereby increasing their share of our productive assets.

Now the construction phase is ending, more of the (undertaxed) profits will be sent back home. And the capital-intensive production and export phase will mean each $1 billion of growth in GDP now creates fewer jobs than it used to. Thank you Labor, thank you Coalition, thank you economists.

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Why KPIs are a dangerous fad

You have heard of painting by numbers, but these days the great fad is management by numbers. I call it the metrification of business - although it's just as prevalent in the public sector. If you know what the initials KPI stand for, you'll know what I'm talking about.

I've been a bean-counter all my working life, first as an accountant, then as an economic journalist. So I've long believed in the importance of measurement, of getting the measurement as accurate as possible and of understanding the strengths and weaknesses of particular measures.

Much of my apprenticeship as an economic journalist was spent making sure I understood how all the economic statistics were put together. But as I've watched the enthusiasm for "key performance indicators" and other "metrics" grow, I've become increasingly sceptical about their usefulness.

The rise of metrification has been built on repetition of the seeming truism that what gets measured gets managed. It follows that what isn't measured isn't managed.

It's certainly true that what we measure affects what we do and the way we think about the phenomenon being measured. So in the drive to hold workers accountable - that is, to increase control over them - and improve their performance, it's become fashionable among managers - private and public sector - to measure key aspects of an organisation's performance.

It's only a small step to setting targets for the performance measures and, often, raising those targets from year to year. You might have targets for the performance of organisations, but also for the performance of individuals. And it's only another small step to link performance to remuneration. We pay for results - what could be fairer?

The rapid escalation of executive remuneration over the past 20 years has occurred not so much because of the rise in basic salaries as the proliferation of "performance pay". A study by Mihir Desai, of the Harvard Business School, found that, in America, the proportion of the total pay of senior managers that is based on share prices rose from 20 per cent in 1990 to 70 per cent in 2007.

But, as The Economist reported last year, Desai found this had warped incentives and fostered malfeasance. Managers had won huge payouts simply because the share market had gone up, regardless of whether they had personally added value.

"They have also gamed the system, sometimes illegally, to hit targets that put fat sums in their pockets," it said.

The trouble with this measurement approach to accountability and reward is that, as the American psychologist Martin Seligman has said, "If you don't measure the right thing, you don't get the right thing."

When the push for micro-economic reform was at its height, someone got the bright idea that if you calculated and made public the equivalent of key performance indicators for all the many responsibilities of the state governments, you'd encourage them to compete among themselves to improve their standing in the league tables.

The Productivity Commission has now compiled and published these indicators for many years. But someone who should know warned me they'd become completely unreliable. Why? Because managers in each state had manipulated their results to make them look good against the competition.

In 2005 the website Crikey.com.au ran a letter from an anonymous public servant reporting their experience with management by KPI.

"Early in June our manager discovered we were a few percentage points away from meeting operational requirements for the financial year. Rather than explain to his boss that staff cannot perform well when there are continual computer problems and weekly changes in procedures and priorities, he instituted a series of ludicrous schemes to improve the statistics," the person wrote.

"Any work that was already out of time was placed on the backburner, not to be touched until after July 1, when it would be counted in the next year's statistics. In other words, work that was overdue would not even be looked at for another fortnight.

"For two days staff did nothing but go through their files searching for cases that could be closed without further action or referred to another area. We achieved absolutely nothing in terms of genuine output for those two days, but our percentage of resolved cases sky-rocketed. We then started on the new work, but only worked on simple cases that could be closed well within the acceptable operational time frame...

"On June 30 our manager proudly announced that we had achieved operational requirements."

I've been around long enough to know that measurement can be a trap. People can be mesmerised by numbers. Because they're objective, people take them to be infallible. They forget (if they ever knew) the assumptions and other limitations on which they're based, they take them to be measuring something they're not and they forget how easily others can manipulate them for their own purposes.

It's easy to measure quantity, but much harder to measure quality. Most jobs are multi-dimensional, but you can't have a KPI covering every dimension. In which case, I can always meet my KPIs by cannibalising some dimension - some aspect of quality - not covered by a KPI.

Einstein said "not everything that counts can be counted". The modern preoccupation with metrics is an attempt to over-simplify the managerial task by confusing quantity with quality.

Sorry, life wasn't meant to be that easy.

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